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Even This Incentive Didn’t Get Millennials to Buy Homes

The federal government’s effort last year to get more millennials and first-time buyers to purchase a home doesn’t seem to have worked. In fact, according to some industry watchers, it might have made it even tougher for them to buy a house.

Last year, as part of an Obama administration-wide effort to boost Homeownership, which is close to the lowest rate on record, the Federal Housing Administration lowered mortgage insurance premiums (MIP) on its loans in most cases by $800 to $900 a year (and in higher-priced areas of the country even more), in an effort to entice first-time borrowers to become homeowners.

The move was also noteworthy because FHA loans have mortgage insurance premiums that are paid through the entire life of the loan, unlike other loan programs where private mortgage insurance (PMI) rolls off once the borrower has gained 20% equity of the home.
The advantage of FHA loans is that borrowers with FICO credit scores sometimes as low as 580 can typically qualify for a home loan, where loans purchased by Fannie Mae and Freddie Mac, the biggest backers of home lending, will usually only buy loans with FICO credit scores no lower than 620. The FHA predicted that about 250,000 new home buyers would be brought into the market over the next three years with the mortgage insurance premium cut.

Indeed, the volume of FHA loans jumped substantially after the mortgage insurance premiums were reduced, according to data from RealtyTrac, an Irvine, Calif. based real-estate research firm.

“There was a definite spike in volume and share shortly following the mortgage insurance premium cut in January 2015,” said Daren Blomquist, senior vice president at RealtyTrac. Data from the research firm shows that the number of FHA loans originated a month rose from about 23,000 in January of that year (an 11.9% share of all the 193,000 home loans made that month) to a peak nearly 61,000 FHA loans in July of 2015 (with the share of all home loans increasing to nearly 17% out of a total of nearly 362,000).

That number was 53% higher than the approximately 40,000 FHA loans made in July of 2014, the summer before the FHA premium cut went into effect on Jan. 26, 2015, Most recently, 49,000 FHA loans were originated in May 2016, with a market share of about 16%. “The numbers remain elevated but have fallen back a bit in recent months,” Blomquist said.

But some industry insiders say that while the volume of FHA loans increased, first-time buyers, especially millennials, weren’t convinced to jump in to the housing market.

”We’re still not seeing those first-time home buyers going to FHA,” said Bryan Sullivan, the chief financial officer of Foothill Ranch, Calif. -based loanDepot, the second-largest online lender in the U.S. “It’s still a relatively older borrower” for FHA loans, he said. Sullivan said that the drop in FHA loan premiums simply meant that other borrowers looking for a home loan opted for the FHA product, rather than bringing additional new buyers into the market. “It’s substantially just a reshuffling of the deck,” he said.

Sullivan noted that in the first half of 2015, 20-something FHA loan purchases made up about 8% of loanDepot’s total FHA volume, though that number had risen to about 10% in the first half of 2016. FHA loan purchasers in their 30s fell to about 27% of loanDepot’s FHA loan volume in the first half of 2016, down from about 29% in the first half of 2015.

In response, HUD spokesman Jereon Brown, speaking on behalf of the FHA, said that while millennial participation is up to nearly 50% of all FHA loans, up from 26% of loans in 2006, attributing the gain to the MIP reduction isn’t easy. “Given how long the trend has been in place and other factors such as home purchases are up across the board, it is tough to attribute increases to the FHA premium decrease. It likely played a role but we have no way of knowing how much of a role,” Brown said.

But Sullivan’s conclusion was backed up by a recent analysis by the American Enterprise Institute, a conservative-leaning think tank in Washington, D.C., which said that far from the premium reduction encouraging first-time buyers, those buyers were already in the market, and simply opted for FHA loans over other products, such as loans backed by Fannie Mae, Freddie Mac and the Department of Veterans Affairs.

Of the 180,000 additional loans the FHA made to new home buyers in the past two years, AEI said, about 85,000 came from other agencies. Just 35,000 loans could be attributed to the MIP reduction, AEI calculated. “Almost all the pickup of the FHA’s share was at the expense of its competitors,” said Edward Pinto, co-director of the International Center on Housing Risk at the American Enterprise Institute.

The timing of the insurance premium cut may not have helped, both loanDepot’s Sullivan and AEI’s Pinto said, as entry level home buyers have been hurt by stagnating inventory, and the MIP cut only encouraged more buyers into a market with limited supply. “Lowering the premium didn’t do anything to create more housing supply, but just created more demand in what’s already a seller’s market,” said AEI’s Pinto. The National Association of Realtors estimated that available homes for sale were just a 4.8 month supply, when a healthy level is about a six-month backlog.

“The millennials have not been purchasing and it just comes back to lack of inventory,” Sullivan said, adding that the benefit of the FHA premium cut has mainly gone to the borrower in their mid-40s with better credit.

Indeed, the cut in the mortgage insurance premium may have just allowed borrowers to purchase bigger or better homes in more desirable neighborhoods, but the reduction in insurance premiums was negated by increased sales prices as borrowers fought over lower inventory.

Pinto said that the mortgage premium reduction accounted for a theoretical 0.5% decrease in monthly payments, but it was overwhelmed by a net 1% markup by sellers in the purchase price. The AEI also noted that after the FHA premium cut, the ratio of the value of first-time home purchases to move-up or second-home purchases rose from 71% of the move-up buyer price, to nearly 75% of the move-up buyer price, the AEI noted.

“Recipients just used the added buying power to purchase more expensive homes,” said Pinto.

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