In speaking with several loan officers lately, many have noted there seems to be a shift in the mortgage market with borrowers favoring conventional products over FHA products, something a recent report from Ellie Mae corroborates. According to Ellie Mae, “68% of all mortgage loans in February were conventional, the highest percentage since Ellie Mae began tracking this trend in 2016.” While information for March and April is not yet available, this is a trend that may continue gaining momentum if current market conditions prevail for the foreseeable future.
Millennials strike again as the driving force behind this recent trend. Recent numbers from the U.S. census indicate that millennials now account for the largest group of homebuyers in the United States. Over the past few months however, there has been a notable decrease in the number of millennials purchasing homes. A recent article from CNBC titled Millennial homeownership suddenly drops after a good run notes that, “Millennial homeownership fell from a three year high of 36% to 35.3% meanwhile the homeownership rate for Americans 35 to 64 rose.” The primary causes of which include:
- Rising home prices
- Declining inventory
- Rising mortgage rates
In the aforementioned article, Cheryl Young, the senior economist at Trulia is quoted saying, “Millennials make up the largest share of those seeking starter homes, a portion of the market that saw inventory plummet 14.2% and prices leap nearly 10%.” This combined with rising interest rates has worked to exclude many millennials from entering the housing market. They can no longer afford higher mortgage payments associated with higher interest rates and purchase prices, nor do they have the money for a higher down payment required for a home at these higher sales prices.
Additionally, millennials have been historically characterized as the more likely candidates to utilize products such as those offered through an FHA loan because of student debt burdens and down payment size constraints. With this cohort excluded, it makes sense that the buyers left in the market would be those aged 35 to 64. Borrowers who are likely to be more established and have more cash to put into a real estate transaction. As a result, they are more likely to qualify for conventional products than the younger demographic.
Further, in a rising interest rate environment, the borrowers remaining in the market are far more likely to choose the mortgage product for which they can get a better interest rate or for which they will pay fewer points. For instance, when rates jumped last Wednesday to their highest levels all week, borrowers were paying an average of 0.49 in points for prevailing conventional rates and were paying an average of 0.79 for a similar FHA rate. In this type of environment, borrowers are likely to go with the less expensive conventional product.
Whether this trend will continue is largely dependent upon:
- whether inventory increases
- whether housing prices drop
- whether interest rates go down
It is most likely that we will see inventory improve as we get further into the spring and summer months. With an increase in inventory, housing prices will likely drop, perhaps not significantly but hopefully enough to potentially allow more buyers (ie: millennials) back into the market. If this happens, we are likely to see a shift in mortgage types back to a more balanced mix of FHA and conventional. As for mortgage rates, unfortunately we are unlikely to see rates decrease in the foreseeable future as we are firmly entrenched in a rising rate environment.