Millennials Ready To Make Their Move?

Some housing experts suggest that millennials may never participate to the same degree as their predecessors in the American dream of homeownership, or at least not anytime soon.

About a fifth of the more than 80 million-strong cohort, a demographic usually described as ranging in age from the late teens or early 20s to the mid-30s, still live with their parents or other older relatives.

About 50% are renters. Large numbers are considered underemployed and underpaid, and they have delayed the usual triggers for buying a home: marriage and kids.

In July, first-time buyers accounted for just 28% of existing home sales, down from an already low 30% in June, according to the National Association of Realtors.

In rosier times before the housing crisis, the historic average was a little less than 40% of the total, says Selma Hepp, chief economist with Trulia, a home-information website that is part of Zillow Group (NASDAQ:Z). Their numbers spiked briefly in 2009, to nearly 39% of home sales. But that was due to a one-time tax credit for first-timers.

Other evidence paints a more positive picture: Most millennials say they want to eventually buy a home if they don't already own one now. The big question: when

A survey by Trulia indicated that nine out of 10 millennials plan to buy a home, "but not necessarily today," said Hepp.

In the survey, 50% of those married with kids said they plan to buy sooner than later — within the next two years. "The ones that have gotten married and have kids are trickling in now," Hepp said.

"Our data and numerous data indicate they are coming back into the market and contributing a bigger share to the new-buyer market," she said. "The thing is, in many markets where they would be buying, they may be constrained by affordability.

That's especially true in markets with good job growth, such as New York, San Francisco, Los Angeles and Austin, Texas. "That is where you are also seeing low inventories and hence higher price appreciation," she said.

Besides getting priced out of hot markets, July's dip in the percentage of first-time buyers might also have to do with those buyers jumping into the housing market in the spring and early summer in anticipation of expected interest-rate increases later this year, housing watchers say.

"Monthly data is very volatile. I think it's going to continue to be a steady rate (up) for first-time buyers," Hepp said.

First-time buyers with little savings often turn to Federal Housing Administration (FHA) loans, which require just 3.5% down.

FHA loans' share of total home originations has been climbing this year. In July, FHA loans made up 22.8% of all home sales, up from 18.1% a year ago, according to a report out Thursday from RealtyTrac, a real estate data company.

'Boomerang' Buyers Are Back

One reason for the uptick may be tied to a cut in insurance fees on Jan. 26 — from 1.35% of the loan to 0.85% — which makes monthly payments lower. On a median-priced home nationwide, that comes to an annual savings of $917 a year, according to calculations made by RealtyTrac in January.

But cash-poor "boomerang" buyers returning to the homebuying market after losing their homes in foreclosures in the housing downturn also are causing the mix of FHA loans to tick up, said Daren Blomquist, vice president at RealtyTrac.

A new mortgage-lending option announced on Tuesday by Fannie Mae will make it easier for credit-worthy first-time borrowers with lower-to-moderate incomes to access financing — with as little as 3% down.

The HomeReady mortgage will consider income from non-borrowers, such as parents, and rental income from a portion of the property, such as a room or basement.

"We noted earlier this year that first-time home buyer activity seemed to accelerate as initial down payment requirements started to ease, and this new program should enable even more borrowers to come up with the initial down payment needed to acquire a home," wrote analyst Scot Ciccarelli of RBC Capital Markets in a client note on Wednesday.

Are first-time buyers really coming back? "I think they are," said Blomquist. "FHA data is going up and (an FHA loan) is typically a first-time buyer.

Any sparks that send entry-level buyers into the buying pool would be good news for homebuilders that target them, such as D.R. Horton (DHI), with its Express Homes division, and LGI Homes (LGIH), both based in Texas, among others.

Cash Buyers Retreat

Blomquist says first-time buyers also are benefiting from lower numbers of cash buyers looking to buy homes. In July, cash buyers' share fell to an eight-year low, accounting for 22.6% of home purchases, down from 23.7% in June and 26.5% in July 2014.

"Fewer cash buyers in the market opens up the market to first-time buyers," Blomquist said.

But first-time buyers might not have much luck in the most expensive markets, where prices are still rising amid tight supply.

Since February, one young couple in Los Angeles, professors at local colleges, lost bidding wars on 12 condos and townhomes, all priced under $800,000, before a bid on a townhome in Marina Del Rey was finally accepted a couple of weeks ago. Their offer of $740,000 was $10,000 above asking price.

"It's rare we don't have multiple offers on properties," said Nikki Kilmer, an agent based in West L.A. for national realty company Redfin. "But I'm seeing less cash buyers now than in June and July. Buyers have slowed their searches down because of the competition and prices (up 5% in L.A. in July vs. a year ago). Or they are deciding to hold off and wait until the market cools down, and maybe jump in around the holidays.

Before the recent stock-market tumble, the Federal Reserve was widely expected to raise interest rates before the end of the year. But most real estate watchers expect the increases from near-low levels to be minimal and gradual, as the Fed has said. In July, the interest rate on a 30-year fixed-rate mortgage was 4.05%, up from 3.98% in June, according to Freddie Mac. On Thursday it was down to 3.84%.

The Mortgage Bankers Association expects the 30-year fixed rate to edge up to 4.4% by the fourth quarter. The gradual increase in rates will likely be accompanied "by a steady improvement in labor markets, which will help to offset the impact," said Lynn Fisher, a VP at the MBA, in an email to IBD. "If anything, a slowly improving economy will provide first-time home buyers stability and the means to enter the market soon.

Markets in the "sweet spot" for first-time buyers are a cross between affordability and good jobs, says Nela Richardson, chief economist at Redfin.

"There are very few places that have both nowadays. South Carolina is booming and is still relatively affordable," she said, pointing to Charleston in particular. "Nashville is booming, The Midwest is still affordable. The coasts, not so good.

FHA loans may not be the best solution for all first-time buyers. "It does come with costs," Richardson said. "The annual (insurance) premium came down but not the upfront fee.

New FHA underwriting rules that went into effect in mid-June may also make it tougher to for first-time buyers to qualify, including changes in the way deferred student loans are factored into debt-to-ratio calculations and gaps in employment.

What's more, a 3.5% down payment means higher monthly mortgage payments vs. a conventional loan, which typically requires 20% down.

"You don't need a lot of savings but you need income," Richardson said. "That's the sticker. Wages are still stagnant. Incomes have not kept up with price increases.

In a Redfin survey in July of more than 3,500 buyers, the 1,400 first-time buyers "almost to the letter said they were concerned about the high prices and the competition," Richardson said.

Housing watchers are hopeful that millennials will gradually step up to the homebuying plate in larger numbers. And when they do, they'll likely have a big impact. Their sheer numbers alone are impressive — larger than the baby-boom generation.

"This is not the last hurrah," Blomquist said.

But their impact won't likely be felt overnight.

"Just getting millennials out of their parents' homes will take time," said housing consultant Leanne Lachman in a speech earlier this year.