Recently, our blog has touched on lots of topics that revolve around Millennials and their impact on the economy. The reason for the frequency of this discussion is that this age group is growing more powerful by the day. As we move closer to this generation’s prime spending years, their actions will continue to reshape our economy. Recently, discussion has shifted to the group’s effect on interest rates. Bill Smead, CEO and CIO of Smead Capital Management, was even bold enough to state, “The Federal Reserve no longer sets interest rates in the United States of America—25-35 year-olds set interest rates.”
Supply and demand will dictate when there will be a rise in residential mortgage rates, so Millennial behavior will have a direct and significant influence on the timing of any uptick in rates.
The Behavior Millennials are Currently Exhibiting:
- Marrying and settling down later in life
- Waiting longer to purchase first homes
- Having children later than previous generations
- Contributing to urban infill by renting to remain close to their workplaces
When Millennials shift to actually wanting to purchase a home of their own, a surge in demand for housing and related mortgages will naturally drive rates higher.
The aforementioned behaviors have led to people taking out their first mortgage later in life. A survey from Zillow in 2015 showed that the age of the average first-time buyer in the U.S. is 33. For the previous 60 years, most Americans had taken out mortgages by the time they reached 30. While mortgage rates increased in lock step when the Fed first raised overnight borrowing rates for banks, mortgage rates are right back where they were before the Fed acted due to a lack of demand for mortgages. Mortgage rates will not change until the 25-35 year olds get ready to raise a family and move to the suburbs en masse.
We may already be seeing the early stages of the Great Millennial Migration. As reported in the New York Times, a substantial amount of Millennials are saving for a down payment and would even use funds for either a wedding or honeymoon to get them closer to home ownership. A Bank of America/USA Today survey showed that 32 percent of Millennials reported saving for a house. From the brokerage end, Redfin shared that “38 percent of Millennials would or have put off a wedding or honeymoon to save for a down payment on a home.”
New home mortgage applications are also on the rise. The Mortgage Bankers Association’s latest report showed a 17 percent increase in applications during March as compared to February. Average loan sizes have also increased, rising from $328,370 to $339,296. First time buyers are getting involved in Redfin home tours (57%) and are taking home-purchase education classes. Redfin chief economist Nela Richardson said, “I think it is significant. They are sticking a toe in the water.”
Many Millennials have delayed home buying for as long as they can. The housing market and interest rates will soon be feeling the full force of this generation. The country should be prepared for housing demand and mortgage rates to steadily rise for years to come.