Millennials are getting older and the generation that has shown a preference for renting are now starting to buy their first homes. The only problem though, is that they might not be able to afford their first home, forcing Millennials to either rely on tough funding methods, or completely missing the time to buy.
Homeowner rates for ages under 35 have decreased nationally by 4.5 percent since 2010 to 2015, according to the U.S. Census Bureau.
USA Today reported earlier this year that Millennials are making 20 percent less than their parents. And home values in Arizona have increased nearly eight percent in the past year. The median average home value in Arizona is $219,800, according to Zillow real estate report.
The report predicts the Arizona home value rate will increase by two percent in the next year.
With more costly homes and less money to pay for it, how can Millennials take part in the home-buying culture?
To finance their home, Millennials are turning to FHA loans to purchase homes. Research done by Ellie Mae Tracker shows Arizona Millennials comprised 86 percent of closed loans in March. Of those, 33 percent were Federal Housing Administration loans.
“They’re all around an easier loan to qualify for,” says Joe Conner, mortgage officer, Homeowners Financial Group. FHA loans require less down, accept lower credit scores and appeal to first-time homeowners such as Millennials, he says.
However, FHA loans may not be the best option long-term.
“While FHA loans are great for some people, there are better loans out there for someone who has a little bit more to put down as a down payment,” Conner says.
A Conventional Mortgage, which is not backed up by the government, can be a more cost-efficient option for people who can put down more money.
“Most first-time homebuyers gravitate to FHA mortgages because they hear it only requires 3.5 percent down, so it seems like an attractive option,” Conner says. “If a buyer can scrape up just another 1.5 percent for a down payment to get to a total of 5 percent down, they would be much better off taking out a Conventional Mortgage vs. an FHA Mortgage.”
The mortgage insurance on a FHA loan, “never goes away,” Conner says. They are also a higher risk loan, he adds.
Despite this, the time to buy a home might be passing for Millennials.
Millennials or anyone who is renting, now is the time to enter the housing market because rates will only continue to rise in Arizona, Conner says.
“If they continue to wait, their borrowing power will decrease over time due to the cost of borrowing money as well as the cost of homes has increased,” he says. “There is no better time to enter the market.”
The time to buy could be especially pertinent for Millennials as Phoenix multifamily rents reach a new high.
Renting may have short-term benefits, but Conner says there are negative consequences for Millennials who do not decide to purchase a home in the near future.
“They’re not feeling it today, but they’re going to feel it when they’re retiring.” Waiting to purchase a home too late in life can mean you will still be paying off your home after you retire, which could be financially difficult to account for, he says.
Despite these barriers to getting their first home, Millennials have been buying homes.
“I’ve heard from local home builders,” Conner said. “They are seeing more Millennials coming through their homes and purchasing.”
Realtor.com’s National Housing Forecast predicts Millennials and Baby Boomers will make up the bulk of the market in the Phoenix area as the number of first time homebuyers in the Phoenix metropolitan area increases in 2017.
The forecast predicts Arizona will be the number one housing market in the nation this year.
The National Association of Realtors reports Millennials make up 34 percent of the housing market, making them the largest generation of home buyers.
Conner doesn’t believe the trend of Millennials not purchasing homes will continue much longer.
“I think it’s already in the process of changing,” he said.