For the better part of a decade, millennials have essentially been removed from the housing sector. In addition to graduating from college during one of the worst recessions in American history, they have simultaneously been stuck with student loan debt, a weak job sector, historically high rents and strict lending standards. On top of all this, many experts believe that it is the participation of millennials in the housing market that will stimulate the economy and give the recovery the traction it so desperately needs. That said; returning millennials back to the housing market is of the utmost importance.
In a recent speech, President Barack Obama acknowledged the importance of helping this entire population. Obama declared that lowering Federal Housing Administration mortgage insurance premiums should permit credit worthy millennials to do what they have wanted to do for so long: buy a home. Their participation alone should contribute to the rise of the entire housing market. In the event that mortgage insurance premiums are lowered, hundreds of thousands of new buyers could flood the market.
“I want to talk about helping more families afford their piece of the American dream, and that is owning their own home,” Obama said in a recent speech in Phoenix. The speech was just one of many that the president is using on his “economic stimulation” tour. “Buying a home’s always been about more than owning a roof and four walls. It’s about investing in savings and building a family and planting roots in a community,” Obama added.
During his speech, Obama announced his intentions of lowering FHA mortgage insurance premiums by as much as a half of a percentage point.
The Federal Housing Administration (FHA) remains one of the major providors of mortgages to first-time buyers because of their low down payment requirements. To receive an FHA loan, borrowers need to put down just 3.5 percent of the cost of the home. That said, millennials would typically receive an FHA loan to facilitate the purchase of their first home. Perhaps even more importantly, the National Association of Realtors (NAR) believes that the move will directly introduce up to 140,000 new buyers to the market. Such an influx would provide an incredible boost to the entire U.S. economy. It may be just what the market needs to finally gain traction for the recovery.
In reducing premiums on mortgage insurance, more people will be able to actively participate in the housing sector. According to Julian Castro, Housing and Urban Development secretary, “By bringing our premiums down, we’re helping folks lift themselves up so they can open new doors of opportunity and strengthen their financial future.”
During his speech, Obama acknowledged that an improving housing market was a critical component to a strengthening economy. In other words, stimulating the housing sector could benefit the country’s entire economy. The nature of the move should favor the millennial population, which many believe to be the key to the current rebound.
“I came here to lay out plans to get responsible home owners back on their feet,” Obama said in his speech.
The recent move to decrease mortgage insurance premiums has been attributed to the complaints of several associations and industry trade groups. Moreover, the NAR urged the agency to lower its insurance premiums, as many blamed them for the distinct lack of interested buyers.
“We are optimistic that more affordable FHA loans will have a positive impact on first-time buyers who have been entering the market at a lower-than-normal rate,” NAR President Chris Polychron said in a statement. “NAR is a strong supporter of the FHA and its vital role in the mortgage marketplace for home buyers. We will continue our work with the administration to help make the dream of home ownership a reality for millions more Americans.”
The rate of homeownership in the United States jumped to 69.2 percent in the fourth quarter of 2004. It wasn’t until 2007 that the homeownership rate began to decline- around the same time as the bubble. More recently, the homeownership rate bottomed out at 64.4 percent, the lowest we have seen it since 1995.
It was clear that drastic measures needed to be taken. However, Obama’s announcement was not met with unanimous approval.
“If President Obama follows through on today’s pledge, he will be increasing the likelihood that taxpayers will have to foot the bill for yet another bailout,” Rep. Jeb Hensarling, R-Tex, said in a statement when news broke of the president’s impending action.
In response to Hensarling’s concern, Obama said that he does not intend to lead the country “down the road again of financing folks buying things they can’t afford.” Subsequently, the FHA will retain the standards that limit “riskier” borrowers. The credit score floor and required underwritings will remain in place to limit the risk of default.