Builders have been confused for a while about millennial buying trends. In a well-intentioned effort to pinpoint how we could best cater to this generation’s needs in the real estate market, we lost sight of certain environmental factors that dictated their confusing actions. Now that millennial behaviors are beginning to change, we’re scratching our heads again, but the truth is that we as builders actually pigeon-holed millennials from the start.
When the economy collapsed in 2008, college graduates couldn’t find a job let alone a house to buy. They either stayed at home with their parents or rented a house to share with roommates, and those who were employed were generally underemployed for some time. As a result, statistics painted a picture of millennials as people who preferred to rent in urban areas and city centers.
Builders naturally assumed that if millennials wanted homes, they’d buy them. This assumption was solidified when surveys asked millennials who couldn't afford homes if they preferred to rent. But people always try to justify their life choices. When you ask people whether they like the home they live in, they almost always respond affirmatively. So did millennials really want to rent? Or did they need to rent, even though they always had dreams of buying? I think they've always wanted to buy. Because now that they can, they are.
The times are a-changin’
I’m in the oldest millennial bracket. I was 27 in 2008, and I rented. In fact, I rented until a year ago.
When I was 22, I was three months into my first job out of college, so I did the most logical thing I could think of: I got a million-dollar line of credit from the bank and bought multiple properties on ARMs. When the economy tanked and the tenants moved out, those interest rates went up to 11 percent, and I had to foreclose. In the years since, I’ve bought and sold thousands of properties, but until the foreclosures wiped out, I couldn’t buy one for my own family to live in. That taught me how to buy on fundamentals and not speculation — for nearly 10 years, all our transactions had to be done with cash.
Starting a family is a key trigger for homebuying, whether it’s marriage or having kids. Millennials are starting families later, but later has arrived. In 2016, millennial women accounted for 82 percent of births. Combine that with the fact that eight in 10 millennials either already own a home or plan to someday, and you have a market that wants to own, not rent. And that means they're ready for new construction.
Building for Millennials
Make no mistake, millennials are finally ready (and able) to buy, but many can’t afford the types of houses that are flooding the market. Some millennials are in need of starter homes that are priced appropriately for their young families, while others are seeking newer, bigger abodes. For builders to deliver these properties, they’ll need to internalize the following strategies:
1. Deal with the debt
Student loan debt impacts millennial homebuyers and, as a result, builders. Fortunately, the rule on deferred student loan debt was changed in 2015, so when it comes to calculating the debt-to-income ratio, FHA lenders can assume millennials are paying 1 percent of their student loan balance each month instead of 2 percent under the old rule.
Low down payments will also attract millennial homebuyers with student loan debt. Some options, such as rural development loans or VA loans, can provide 100 percent funding. Still, the most common option for millennials is an FHA loan with 3.5 percent down and a 55 percent back-end debt ratio. Does your sales team know how to calculate back-end debt ratios? Are your salespeople experts in the guidelines on FHA and conventional debt ratios? If not, get them trained up.
2. Aim for affordability
Most millennials just can’t afford homes over $300,000. For Americans born between 1981 and 1997 (the definition of millennials provided by Pew Research Center), the median annual income ranged from a low of $18,000 in Montana to a high of $43,000 in D.C. The median millennial can only afford a little more than $1,000 per month in principal, interest, taxes, and insurance; in most areas, that means homes around $200,000 at the highest.
There are a couple key ways builders can cut down on price, though. Increasing density gets the land cost in line with your product, and you can also keep things basic and use entry-level materials. Keep in mind, you can still deliver a high-quality home, but you might want to leave out the quartz countertops. Most successful builders live in nice homes, but don’t let yourself forget who you’re building for. Even a basic new house is new, and millennials will see it as a huge step up from the used market (or their parents' basements).
3. Solve the 'home to sell' issue
As millennials enter their late 20s and early 30s, they’re understandably looking to upgrade. There is a large market of people who purchased their starter home for somewhere in the neighborhood of $100,000 to $200,000, and after getting married and thinking about starting families, they’re currently in the market for homes ranging from $200,000 to $250,000. Yes, a $200,000 home is a move up for many millennials.
One of the key steps to helping millennials close on new homes is finding a way to help them close on their current one without a double move or double payment. For some builders, offering a buyout program is just the ticket. Younger clients are open to the idea of swapping out a house and not having to go through the trouble of listing.
4. Avoid expensive technology
I hear again and again how millennial buyers want homes that are teeming with the latest and greatest home automation systems. In my experience walking through homes with them, they want a house that isn’t smelly, and they need a good value.
Sure, home automation is fancy, but if it drives up the price, they can't afford it. Deliver value and the basics if you want to reach the masses; deliver high tech if you want to reach the classes.
Millennials have been a difficult market for builders to decode, but they’re ready and willing to enter the real estate arena. By keeping the above strategies in mind, builders can unlock a huge demographic of potential homebuyers who are interested in new properties that are right for them. Is your team ready to sell a gazillion homes to millennials?
