This article was first published in the Appraisal Buzz Magazine.
The average age of today’s first-time home buyer is 30 years old, which means they fall within the ubiquitous millennial age bracket. The mortgage lending industry has already begun to feel the pressures of a generation with expectations of efficiency in decision making, communication, and execution of their home buying transaction.
Although many millennials are waiting longer to get married and have children, which are the traditional reasons to buy a home, the generation has reached a tipping point. Rental prices in the suburbs are increasing sharply as millennials make a move to settle down outside of the city and this is driving them to buy homes. Despite high barriers to entry such as poor credit scores, student loan debt, high home prices, and a housing market that is still on the mend, most millennials across the nation anticipate buying homes and paying mortgages in the very near future.
In fact, just last year, millennials made up the largest share of home buyers at 34% (68% of new home buyers) and with their business came increasing needs for more digital, and in many cases, more automated solutions. While some have hypothesized that pivoting towards technology may lead to a bleak future for loan officers, real estate agents, and appraisers, others see millennials’ requests as an opportunity for development of new competitive advantages. Despite strides towards recovery, the housing industry is still healing from its 2008 collapse. With 75.4 million millennials in the United States – one-quarter of the United States population – millennials offer the mortgage industry the opportunity for growth we haven’t seen since the baby boomers began buying their first homes. However, millennials are riddled with student loan debt. While this has historically kept them from obtaining a home loan, Fannie Mae introduced solutions this past April to help millennials afford homes despite their debt. Now, 90% of millennials plan on owning a home in the future – that’s more than 68.6 million mortgage appraisals.
According to Fannie Mae’s National Housing Survey, 42% of millennials don’t know what lenders expect of them, and 73% were unaware of lower down-payment options that can help them afford to buy a home. Additionally, 57% cited financial reasons for their inability to buy a home, but they may not fully understand the lending and mortgage appraisal process well enough to answer this question accurately. In fact, 22.7% of the millennials’ biggest fear about home buying is that they will be paying more than the property is worth. This is particularly concerning when the buyer is putting up a low down-payment.
Keeping the stagnation in the growth of the appraiser profession in mind, these numbers present a challenge. Lenders, homebuilders, and regulators are becoming increasingly inquisitive about programs that eliminate appraisals or reduce the scope of the appraisal transaction. On the surface, these programs seem to position the industry to grow loan origination volume much more efficiently. However, when considering millennials’ general inexperience in determining reasonable home values or understanding differences in mortgage loans, the assurance of a sound appraisal product is critical. Imagine a scenario where a segment of the population, like millennials, purchase homes who assume they have 10% equity when they only have 5% due to an inaccurate valuation. The risk of systematic and strategic default is increased sharply.
Whether through a traditional, uniform residential appraisal or a newly-developed alternative appraisal product, the industry must take heed that ensuring first-time buyers make educated purchases is essential to the long-term success of the housing market. We must not allow first-time buyers to take on mortgage debt on top of their student loan debt that is not matched with the value of the underlying asset. Sound appraisal practices founded in the right mixture of data, technology, and experience are a fundamental building block in long-term housing success. This critical balance is achievable, and Fannie Mae and Freddie Mac seem laser-focused on innovating to the correct mix of data and human intervention.
As industry stakeholders, we must admit that the mission of the Government-Sponsored Enterprises (GSEs) is to provide access to affordable mortgage financing, lenders have a responsibility to their shareholders to originate loans and real estate firms exist to facilitate the sales process. These missions are clear and necessary, but neither the GSEs, lenders, nor agents have a fiduciary responsibility to ensure the borrower’s purchase investment is sound. The best source of assurance remains an independent, professional appraiser utilizing data, market instincts, and sound judgment to provide a value opinion that supports the buyer’s decision, or not.
We must remember the lessons the housing bubble taught us: data can be manipulated, human beings make decisions with less than complete information, and capitalism has an inherent moral hazard baked in. Sound adherence to longstanding and common-sense financial checks and balances, supplemented by the benefits of the data evolution, should allow our housing market to sustain success for the long-term. With the influx of demanding, impatient, and relatively uninformed first-time buyers coming to a showing near you, it has never been more important to support and serve the fundamental building block of the housing market – the first-time home buyer.
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