Reports of Generation Y’s purchasing power are astronomical. Ranging from $125 billion to $890 billion, this group more commonly known as Milllennials will fuel the U.S. economy. With Millennials’ peak buying power ahead of them, those in the settlement services industry would be wise to establish relationships with the largest generation in the U.S. and an 80-million-plus consumer force.
Despite all the talk about student-loan debt, the economic and financial challenges young adults have faced since the recession and the lack of desire to buy, the Millennial generation represents the largest share of recent home buyers. >>
For the second consecutive year, the National Association of Realtors (NAR) Home Buyer and Seller Generational Trends study found that the largest group of recent buyers was Millennials. The study, which evaluates the generational differences between recent home buyers and sellers, found that those 34 and younger, accounted for nearly a third of all home buyers in 2014. This is more than the younger and older Baby Boomers combined. In terms of first-time buyers, Generation Y also has the largest share at 68 percent.
The survey highlights the untapped demand for homeownership that exists among young adults. With Millennials entering their peak buying period and expected to soon surpass boomers in total population, Lawrence Yun, NAR chief economist, believes the share of Millennial purchases would be higher if not for the numerous obstacles that have slowed their journey to homeownership.
“Many Millennials have endured underemployment and subpar wage growth, and rising rents and repaying student debt have made it very difficult to save for a down payment,” Yun said. “For some, even forming households of their own has been a challenge.
“Even though the share of first-time buyers has fallen to its lowest level since 1987, young adults in general are more mobile than older households,” Yun continued. “The return of first-time buyers to normal levels will eventually take place in upcoming years as those living with their parents are likely to form households of their own, first as renters and then eventually as homeowners.”
Financing the Purchase
Not only will younger homebuyers influence how homes are found and sold, this burgeoning segment will impact the origination pipeline. Credit unions are capturing market share by their ability to offer low-cost mortgages and programs targeting first-time homebuyers. In fact, credit unions’ market share grew from 1.9 percent to 8.3 percent from 2005 to 2015, according to the Credit Union National Association.
With more than 100 million members, credit unions appeal to first-time buyers with the standard low-down-payment programs backed by the Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture. Because credit unions typically keep loans in their portfolio, they can make decisions on a loan-by-loan basis and consider borrowers that don’t fit in the Fannie Mae and Freddie Mac underwriting box.
State Employees’ Credit Union of Raleigh, N.C., one of the country’s largest credit unions with nearly 2 million members, had a mortgage portfolio totaling $8.3 billion in 2005. By the end of 2014, the portfolio grew to nearly $14 billion, according to Stacie Walker, the credit union’s senior vice president for loan origination services.
While big credit unions, such as Navy Federal and Pentagon Federal, offer first-time buyer programs, smaller institutions are jumping into the purchase market offering flexible adjustable-rate mortgage products.
Joseph Wiley, the director of loan acquisition for OwnersChoice Funding, which originates and services mortgages for around 200 credit unions, said credit unions are effectively marketing to members about the availability of mortgage options and connecting with real estate agents who control the purchase business.
Meanwhile, Fannie Mae and Freddie Mac launched programs last year that allow for down payments as low as 3 percent. The Federal Housing Administration also significantly lowered its annual mortgage insurance premium from 1.35 percent to 0.85 percent, depending on loan parameters.
NAR’s study found that 97 percent of Millennials were likely to finance their purchase. The median down payment for this group was 7 percent. Younger buyers who financed their home purchase most often relied on savings for their down payment. A quarter of this age group also was more likely to receive a gift from a relative or friend—typically their parents.
Joseph Murin, chairman of JJAM Financial LLC and former president of Ginnie Mae, said lenders are realizing the enormous force Millennials will be in the market. Lenders will need to be aware of the group’s appetite for certain loan products, however.
“It’s a market with incredible, yet untapped, potential,” he said. “But Millennials, from what we’ve seen so far, have different attitudes and different preferences than their parents and grandparents. We know that this generation is debt-averse, so we’ll see more products like the 15-year fixed mortgage. We know that this generation tends to be environmentally-aware, so urban living—shorter commutes—and green homes—possibly even smaller homes—are among its top priorities when seeking a new home.”
According to NAR’s survey, the median age of millennial homebuyers was 29, their median income was $76,900 ($73,600 in 2013) and they typically bought a 1,720-square foot home costing $189,900.
Regardless of their age, buyers used a wide variety of resources in searching for a home, with the Internet (88 percent) and real estate agents (87 percent) leading the way. Millennials were the most likely to use a real estate agent, mobile or tablet applications, and mobile or tablet search engines during their search. In contrast, Gen X buyers were the most likely to use an open house.
Although the Internet was the top tool Millennials used to find the home they purchased (51 percent), they also used an agent to purchase their home at a higher share (90 percent) than all other generations.
Although most purchases by all generations were in a suburban area, the share of Millennials buying in an urban or central city area increased to 21 percent in the past year (19 percent a year ago), compared with only 12 percent of older boomers (unchanged from a year ago). Among the biggest factors influencing neighborhood choice, Millennials were most inclined to purchase a home in a quality neighborhood (75 percent) conveniently located to their job (74 percent). The study also revealed that Millennials plan to stay in their homes for 10 years.
In an effort to connect with homeowners, Fannie Mae last year introduced a smartphone application designed to help them learn how to save for their first purchase. The “HOME” app includes a tool to help potential buyers learn how much they can afford in a home purchase. It also features information about mortgage payments, tips on how to save for a down payment and information on how making extra mortgage payments can help save on interest costs. Fannie Mae encourages lenders to share the app with potential customers.
Brian Rieger, principal of the Cleveland-based consulting and public relations firm True Impact Communications, said the industry has talked about the importance of educating and communicating with consumers for years.
“Some have taken that to heart, others haven’t,” he said. “But we are looking at a whole new generation of homebuyers, which sees the world very differently from previous generations. “
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The biggest lesson when marketing to Millennials is that companies must know and use social media. According to Pew Research, more than three-quarters of Millennials have created a profile on a social networking site. To reach this demographic effectively, advertising must center around engaging content.
With the Internet and social media, the number of sources for information has increased dramatically. When gathering information and making buying decisions, Millennials rely on recommendations from peers and friends more than from experts, according to the U.S Chamber of Commerce Foundation. Having grown up with mobile and digital technology as part of their everyday lives, they switch their attention between media platforms 27 times per hour, according to a whitepaper from Innerscope Research and Time Inc. This means advertising messages must be short and engaging in order to grab Millennials’ attention.
With the majority of Gen Yers using social media to connect with brands, firms would be smart to allocate more resources to digital channels. As more and more consumers in this age group use the Internet to begin their home search, Bill Risser, vice president of new media and education for Chicago Title Agency, believes it’s only inevitable that Millennials become more engaged in selecting their title or closing company.
“For Millennials, it won’t end with the online home search,” Risser said. “They will Google the title and settlement provider as well. They check online for reviews of restaurants, cars and technology. Why wouldn’t they use it for the biggest purchase in their lives?”
Settlement Services Shift
Recognizing the need to adjust to market needs, Elliot Liss, principal with Maryland-based Closeline Settlements, said the industry will need to find ways to streamline and digitize the closing process as much as possible. He believes Millennials will want to receive transaction status updates without having to call or email. According to Liss, a generation that is flexible, community-focused and hyper-communicative will want businesses to cater to its preferences. “We’ll have to mirror those traits to keep up with them and to keep up with the lenders attempting to win their business,” he noted.
As lenders and real estate agents adapt to younger consumers’ needs, the settlement services industry must evolve as well. Since title professionals are typically the last point of contact at the closing table, lenders will want to work with settlement service providers that understand Gen Yers’ personalities and deliver results that match expectations.
“The next boom market will favor lenders who market to and meet the demands of Millennials,” Murin said. “The strategic partners they choose will be those that are able and willing to help them win share among Millennial homeowners—both at the marketing end as well as the customer service end. We will have to promote, produce and service products that are authentic, straight-forward, easily accessible and provided quickly.”
Justin Tucker, vice president of marketing, sales and technology for WFG National Title Insurance Co., points out that Millennials have lived in a world immersed in technology and communicate differently than past generations. This will impact the way the industry delivers its products and closes deals.
“They Tweet. They Google. They Instagram. And they share their likes and dislikes very publicly,” Tucker said. “Millennials will compare the home-buying process to other transactions, such as education loans, auto loans, personal loans and even basic shopping. All of those processes have come a long way from where they were even 10 years ago. However, with the mortgage transaction, they see a process from the Stone Age. Communication can be slow and disjointed. The process takes a long time and is simply too cumbersome to them. This is not all the industry’s fault, but the industry will be forced to transform to appeal to these new buyers and sellers.”
With the Internet as their megaphone, Millennials will certainly drive change in the market and the speed in which information is exchanged. With social media’s virility, Gen Yers are vocal consumers who influence the purchases of others. Their connectedness via social media puts additional pressure on companies to ensure a positive closing experience. Murin said that Millennials will want to know why they have to sign dozens to hundreds of pages of paper to close a mortgage when everything else they buy happens within seconds or minutes, and usually online. Weaned on signing for anything from student loans to groceries on an electronic keypad, Millennials will want similar products when purchasing a home.
“This may be the generation that finally spurs the long-discussed ‘e-closing’ into the mainstream,” Rieger said.
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