It’s almost 2022 and we are in some of the most interesting times. In just a little over a decade we have had two major recessions, a pandemic virus, seen historic low interest rates, and a historic home purchase boom.
Amidst these highs and lows the Federal Reserve, the CDC, and other Federal Agencies of the government have been in our lives to either combat disease or bolster the economy.
As we look into 2022, there are dynamics that will shape the housing and mortgage markets for decades to come. While I have written about demographics before – showing millennials are driving demand for housing – it’s what makes up future homeowners and renters that is most interesting.
What's in this Article?
Major demographic shifts coming
Harvard University has a research think tank called the Joint Center for Housing Studies. It’s a highly regarded academic center that does nothing but look at housing from a variety of angles. Each summer they publish the State of the Nation’s Housing, a publication awaited for and studied by policy makers who work on housing issues.
Several years ago they dedicated their publication to focusing on demographic changes in household formation. Household formation, as an economic term, means new households formed whether rented or owned homes.
The demographic changes in new households will impact cultures, education needs, marketing strategies, recruiting for companies, and so much more.
Take a look at this: In 2021, on the left side of this chart, minorities already make up most of household growth.
Now look at the chart on the right side, which details new household formation from 2025 to 2035. According to the study, minorities will dominate household formation and whites will become a small sliver of growth.
Why is this? The baby boom generation, the largest in U.S. history until the millennials, drove household formation in this country starting mostly in the early 1980’s and then forward as they bought starter homes, move up homes, vacation homes, and more. Baby boomers were also more than two thirds white non-Hispanic.
Diverse millennials take center stage in the housing market
Today, 44% of all owned homes are owned by baby boomers, while millennials own only about 11%. But this is shifting dramatically. The largest cohorts of millennials are now reaching their early 30’s, known to be the peak period for buying a first home and, wow, are they having an impact.
Look at the growth of the millennial in their growing dominance in the first-time homebuyer market just over the past decade:
In this slide from Freddie Mac you can see how millennials have grown into the dominant contingent of first time homebuyers, and this will only continue to be the case.
After all, the baby boomers are aging and their numbers are already declining, while millennial numbers are growing. There are millions more renters who are still in their 20’s, on their way into those peak first-time homebuyer years. The impact to the nation, and especially those in real estate and mortgage is profound. This is not a matter of “if”, but “when” in terms of impact.
How will the real estate industry respond to shifting demographics?
Looking back at the above demographics chart, minorities make up two-thirds of household formation and that will only increase in the decade ahead. The vast differences are already starting to be felt in communities across the nation and to the companies in the mortgage industry that support housing.
There are a rapidly growing number of Hispanic-, Black- and Asian American-owned real estate firms. There are mortgage companies that started a decade ago that are first-generation Latinx-owned and -operated, their founders hailing from Cuba, Mexico, Puerto Rico, and other areas. Dynamic new trade associations have emerged over the recent years that serve Black, Asian American, and Hispanic real estate professionals such as NAMMBA, ARREA, and NAHREP, just to name a few. These organizations represent the dynamic and exciting growth that is changing the nation as we speak.
Banks won’t be the primary lenders for the next generation
“Non-Depository” lenders – companies that offer financial services but are not banks – are critical to financing these new homebuyers.
In a report to Congress in November 2021, The Federal Housing Administration (FHA) reported that 84% of its home purchase activity was to first-time homebuyers, setting it apart from other lending sources. The same report shows that roughly two-thirds of African Americans and Hispanics got their mortgage this past year from FHA. But not all lenders offer an FHA loan product and many have backed away from the program. In fact, as FHA reported, independent mortgage bankers (IMB’s) like Fairway Independent Mortgage Corporation and others, versus banks, dominate issuance of FHA loans (Fairway owns Home.com).
At this pace, FHA loans issued by traditional banks may become almost non-existent. At the same time, FHA loans, while not for everyone, are critical to many first-time buyers, as they offer smaller down payments and other flexibilities over other products in the market.
There is so much for lenders to think about as the sands literally shift beneath their feet, and household formation brings vibrant changes that will alter the face of this nation.
For homebuyers, though, one basic conclusion should be to talk to a non-bank lender in their process. After all, as HUD’s own data shows about the FHA program, it’s non-bank lenders that are providing the bulk of FHA loans to this nation’s housing system. Banks, Credit Unions, IMB’s, and mortgage brokers all support housing finance, but some may offer more loan options than others to accelerate this exciting growth sector.
How can mortgage lenders change to better serve the current demographic?
There are many other opportunities facing mortgage lenders. Some have been slower to recognize the need to increase the marketing efforts to this new, massive generation of potential homebuyers.
Perhaps they should start doing things like offering first-time homebuyer seminars in diverse communities and groups. This may help younger people realize that buying a home may be in reach. Recruiting loan specialists who are multi-lingual will only help, and marketing departments should pursue creative concepts to advance the reach of the company into these communities.
No matter the method of addressing change, the change is real, and the industry has yet to fully realize the significant opportunity to expand into this exciting new world.
And as a current or future homebuyer, the fact that lenders are adapting is good news indeed.
Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.