The Connection Between Financial Literacy, Millenials, and First Time Home Buyers

Home affordability is not a modern problem. In Zillow's In Search of Affordability, Krishna Rao writes, "Across the United States, strong home price affordability has been recently eroded by a combination of rising home prices and mortgage rates. Some areas, particularly on the West Coast, have begun to look unaffordable compared to their historic norms, forcing some household to look to the periphery of urban areas in search of affordable homes." Zillow measures affordability by looking at how much of a person's monthly income is spent on a mortgage payment. Historically in the United States, the median household would need to spend 22.1 percent of their income to afford the mortgage payments on the median home. This number fell dramatically during the housing recession, hitting a low of under 13 percent by the end of 2012.

My son will soon be graduating from the University of Texas' McCombs School of Business. He's a competitive kid, and when the school year is done will be leaving Austin and headed for Europe to race road bikes competitively. I bring this up, not to ask if anyone knows any good bike coaches or donations for airfare, but to highlight an economy that people are flocking to and few want to leave: Texas. Not only did a recent ABC poll put Austin at #4 for recent college grads, but the Dallas Fed issued a report titled, "Texas to Remain a Top State for Job Growth in 2014" and reminding us that "Texas was the third-fastest-growing state in terms of job growth in 2013, trailing only North Dakota and Florida. The Texas economy will likely continue growing faster than the national average in 2014, and nonfarm employment should increase by 2.5 to 3.5 percent." In addition, Texas Leads Nation in Creation of Jobs at All Pay Levels. "Texas experienced stronger job growth than the rest of the U.S. in each of four wage groups--lowest, lower-middle, upper-middle and highest paid-from 2000 to 2013. Texas has also created more higher-paying than lower-paying jobs."

I also bring him up because he is in the fabled Millennial generation (age 18-34). The home ownership rate has been dropping steadily since its high of 69.2 percent in 2004 to now just 65 percent. Millions lost their homes to foreclosure and millions more never entered the market, fearing falling home prices. Now, 10 percent of U.S. renters say they would like to buy a home in the next year, according to a new report from Zillow, which surveyed renters in the nation's 20 largest housing markets. If all the renters who said they wanted to buy a home in the next year actually did, that would represent more than 4.2 million first-time home buyer sales, about twice the number of first-timers in 2013.

First-time home buying has actually fallen to the lowest level ever recorded by the National Association of Realtors, at just 26 percent of sales in January. These buyers usually make up roughly 40 percent of the market. Interestingly, the majority of the renters who said they wanted to buy felt they could afford home ownership, despite rising home prices and rising mortgage rates. The trouble is there is just not that much out there to buy. Home construction is still recovering at a slow pace, and prices for newly built homes are far higher on average than for existing homes. The number of homes for sale is rising slightly but is still well below historical norms across most markets.

"Even after a wrenching housing recession, this data shows that the dream of homeownership remains very much alive and well, even in those areas that were hardest hit," Zillow's chief economist Stan Humphries said in the report. "But these aspirations must also contend with the current reality, and in many areas, conditions remain difficult for buyers. The market is moving toward more balance between buyers and sellers, but it is a slow and uneven process."

Homeownership aspirations among renters were actually highest in some of the hardest hit markets of the housing crash, such as Miami, Atlanta and Las Vegas, according to Zillow. That may be because so many renters there are former homeowners who lost their homes to foreclosure. They are now seeing these markets recover, as investors bought up the distressed properties, pushing prices higher far faster than anyone expected. These renters are seeing market resilience, and likely want back in.

Foreclosure activity, in fact, fell 10 percent in February from January and is down 27 percent from a year ago to the lowest total since December 2006, according to a new report from RealtyTrac. But there have been some great buys through the foreclosure process, as morbid as that sounds.

Ironically, these bargains might be perfect for first-time buyers looking for a good deal, but they remain stuck in limbo land. Meanwhile, tight credit and higher prices are keeping many of these same potential buyers away from new construction. The level of student debt, not able to be discharged through bankruptcy, is climbing. (Auto loan debt is also increasing, and after several months of declining, it appears that mortgage debt is beginning to creep higher. Unfortunately for today's youth, tuition has gone up at 3x the inflation rate for decades. Not only that, but their overall wealth has not benefitted from the rally in equity prices, nor from the housing market appreciation (which has benefitted Millennial's parents - and in fact worked against first time home buyers).

For loan officers wanting to work with younger people, specific training programs are popping up. For example, I saw this ad: "You may need to communicate with the next generation of clients in your business. That is IMPERITIVE. Here is a great link to "speaking digital."

This is a big topic "out there" in the industry, with the thinking that, since there are more Millennials (age 18-34) kicking around than baby boomers, they will step in and become first time home buyers, and help to boost the housing market. The numbers support the argument. But they have to be financially savvy, and many of them are not. A few weeks ago at the Wisconsin MBA event I had the opportunity to spend some time with Brenda Campbell (brenda@makeadifferencewisconsin. org), the Executive Director of the "Make a Difference Wisconsin" program. It is a non-profit organization dedicated to providing youth with the financial management tools needed for success. Funds go to mobilizing a 500 member volunteer group that provides in-school financial education to thousands of Wisconsin high school students. "Committed to empowering teens to make sound financial decisions by increasing their personal financial knowledge and skills." Heck, who wouldn't want kids to learn about bank accounts, interest, budgets, and credit? After all, many of them will be future home owners.  

Yes, programs are growing in popularity, but parents should be training their kids to be financially literate and establish credit. Tracey Sanderson, VP at Washington's Banner Bank, contributed, "Credit is a game that is to be played wisely and there are few ways to learn the rules. Parents are the best teachers... but many of them have never been taught to play the game either. Parents - Teach your children to save and to make regular monthly payments.  Habits that are established when we're young tend to stay with us a lifetime.  Here's how I taught my son... and he was smart enough to listen.

"Age 14: Establish a savings account. For every dollar the child deposits, the parent matches.  Funds cannot be withdrawn. This account is designed to save for the down payment on a car.  Trust me - the vehicle will mean more when they have a vested interest. Age 16: Car shop.  The savings may not be enough. See if a community bank or credit union will allow the child to be on the loan to begin establishing credit history.  Parent will need to be primary Borrower, but do NOT make the payments. Child will learn nothing unless they are responsible.  If needed, payment them a weekly allowance that will cover the expense - but do not take care of it for them. Age 18: Now a responsible adult. First, check credit history with free annual credit report to make sure no one has misused your information. You are not legally responsible if someone has used your information fraudulently before age 18 - just contact credit reporting agencies (you may have to provide proof of age). Start with a store credit card (Sears) or ask a parent to cosign a secured Visa. Charge $20 to $40 a month. Pay in full the minute the bill arrives. In approximately 6 months, open another account (gas, store or maybe by this point a Visa or Master Card). Charge $20 to $40 a month. Pay in full the minute the bill arrives. Age 19: Open a small secured loan (car, if possible).  Set up auto-pay so that it is always paid on time.  If it's not possible, apply for another unsecured account. Open one more credit line (Visa, MC, store, gas).  Charge $20 to $40 a month. Pay in full the minute the bill arrives."

Tracy concluded, "With these 4 accounts - paid on time every month, a person can reach a great score in no more than 2 years (720ish). Don't let the accounts go dormant.  They have to be used - just don't ever max them out (that will lower your score).  Use them for daily incidentals (food, gas, clothing) - as long as you pay them in full each month. Do not buy things you can't afford.  That defeats the purpose of playing the game and the creditors win.  You will be paying for clothes long after they've gone to Goodwill." Thank you Tracy!

Back to the markets! The foundation of a recovering economy are built on jobs and housing. Yesterday we learned that the pace of U.S. home construction rebounded less than forecast in March: housing starts climbed 2.8 percent to a 946,000 annualized rate following February's 920,000 pace. Building permits declined 2.4 percent to a 990,000 annualized pace versus forecasts of "unchanged." Fed Chair Janet Yellen gave a speech, although it "offered nothing particularly market moving." And thus we found the markets nearly unchanged.

Today is an early close for the bond market, and it is closed tomorrow for Good Friday. For news we'll have Initial Claims (+11k to 311k) at 8:30AM EST and April Philly Fed (+1.0 to +10) at 10AM EST. The Treasury Department will announce details of next week's auctions of 2-, 5- and 7-year notes. For numbers in the early going, the yield on the 10-yr. at the close Wednesday was 2.63%, and we're unchanged in the very early going this morning.