As the market changes, private lenders must change along with it.
The Mortgage Bankers Association, in a report on the future of housing, predicted the U.S. housing market would undergo one of the largest expansions in its history between 2014 and 2024, adding 15.9 million additional households. The growth is being driven by baby boomers, millennials and minorities. It’s an interesting time to be in housing as these demographic and population changes alter the landscape—adding both challenges and opportunities for private lenders serving the borrowers and investors in the housing economy.
Consider these shifts:
- Hispanic households will lead growth in the U.S. with 5.5 million additional households over the next decade. Many of these households will be millennials, and they will be both renters and homebuyers.
- There will be 20 million more households with those over age 60, 18 million more households with those ages 18-44, and only four million fewer households in the 45-60 age group.
- New minority households will outnumber new white households by one-third.
- The U.S. will have 4.7 million new renter households and about 8.9 million more homeowners by 2025, assuming the current home-ownership rate remains stable.
- Renter households are expected to increase, but not at the pace seen in recent years.
In a study released in December 2017, the Joint Center for Housing Studies (JCHS) of Harvard University predicted 13.6 million more households between 2015 and 2025. It notes that major demographic changes are on the horizon in age and race/ethnicity, among others.
One notable change the lending industry has talked about a lot is the impact of the millennial generation. The younger half of this massive generation is approaching their 20s and 30s—the ages most likely to rent—over the next decade. JCHS notes that nearly half (47%) of these younger rental households are minorities. As millennials age, many will also be transitioning from renters to homeowners.
Suffice it to say that lenders need to be constantly vigilant and innovative in their outreach to millennials, whether they are looking for a fix-flip investor with an attractive asset-backed lending product or wanting to find homebuyers hunting for a conventional mortgage. Either way, it’s likely technology will play a role in the decision-making process.
Millennials’ use of technology is changing how businesses are run, including those in the mortgage industry. If a company’s lending platform isn’t already tapping into advanced technology, then they are already behind the curve. The millennial generation has grown up with cell phones, the internet and social media. They prefer texting and Snapchat, and consider email and phone calls outdated methods of communication.
There’s been a lot of talk about the eMortgage over the years, and there has been an uptick recently. Still, the adoption rate among traditional mortgage lenders has been pretty dismal. Technology-savvy real estate crowdfunders, on the other hand, have pushed the envelope in the past five years, with innovative technology that uses advanced algorithms to provide online real estate lending and investment platforms.
Smaller, regional hard-money lenders may not have the bandwidth or the capital backing that national venture capital-funded real estate crowdfunding platforms enjoy. Yet even the smallest of private lenders will need to explore ways to embrace technology to attract and retain millennial customers who expect to invest in real estate and borrow funds using their smartphones or tablets.
The Future Is Diverse
Again, many of the millennials who will impact the future of housing are Hispanic, Asian, African American or of another race or ethnicity. Consider this interesting statistic from the MBA: If sex-, age- and race-specific household formation rates remain at low 2014 levels, demographic changes alone will add 5.5 million Hispanic households, 3.4 million non-Hispanic white households, 2.4 million more African-American households, 1.8 million more Asian households and 730,000 more other households. In other words, the housing industry will have more than 10 million minority households by the year 2024.
Now consider that minority households undergo more challenges on the path to homeownership. Homeownership rates for African Americans and Hispanics are below 50 percent, while the rate for whites is more than 70 percent. These rates for minority populations have been lower historically. Slow wage growth for low-income workers amid a backdrop of rising housing prices, negative home equity in minority neighborhoods and the inability to afford a down payment are a few of the barriers to increased minority homeownership.
The Pew Research Center notes that the home-ownership gap between blacks and whites has widened since 2004. African Americans and Hispanics have a harder time getting approved for conventional mortgages than whites and Asians do. When they are approved, they tend to pay higher interest rates, Pew said. Lenders have cited debt-to-income ratios and poor credit among the main reasons for denials.
To be sure, there are many complicated socio-economic challenges that impact minority homeownership numbers that lenders cannot fix on their own. These may require political, legislative, regulatory or advocacy actions at the local, state and national levels. The nation’s foreclosure and financial crisis resulted in major declines in homeownership as well as a shift in how people view the rental market. Growing numbers see it as a preferred alternative to homeownership.
The Golden Years
Lenders have a host of opportunities, along with some challenges, in reaching millennials and minorities as future borrowers, real estate investors, homebuyers or renters. But what about aging baby boomers?
The generation that’s made an indelible impact on our nation is getting older, impacting everything from health care to Social Security to the labor force. While millennials are forming households, baby boomers are reaching ages in which they, or their loved ones, will be making decisions about downsizing, assisted living, nursing home care and the own-versus-rent decision.
Because this generation is so large, it’s important for lenders to pay attention to trends, as they could have a long-lasting impact on the housing economy. Will most choose to age in place, or will they put their homes up for sale and become renters after retirement or as old age sets in? Will millennials wanting to transition to homeownership or investors anticipating continued demand for single-family rental housing swoop and scoop up their homes? Or is there a risk of a supply glut if the trend moves to condos and apartment living?
If housing—no matter the type, is to appeal to aging baby boomers, what must be done to attract them? Will homes or condos need wider doors and hallways for wheelchairs? Should yards be smaller and low maintenance? Should there be a neighborhood grocery store within walking distance?
As the market changes, private lenders must be nimble enough to change along with it. It will be critical for lenders to implement new methods for reaching an evolving and diverse population with lending products that meet their needs. They must also speak to savvy investors who understand how to capitalize on this changing landscape. Trends are quickly changing, and the outlook for housing growth will be robust in the coming years. Are private lenders ready?