When the Federal Reserve raised interest rates last month, the news was considered a sign that the U.S. economy was on the upswing.
But that quarter of a percentage point rate hike has already had an unintended consequence for house-hunting Millennials—a cohort that lags behind previous generations when it comes to rates of home ownership. New research from Fitch Ratings, a credit-ratings research company, found that the average U.S. Millennial borrower has lost 9% in mortgage capacity over the past three months.
What does “mortgage capacity” mean? It’s an analysis that looks at a borrower’s income and job stability compared with his proposed debt, which helps a lender determine how likely that borrower is to repay the loan. It is also one of the factors that affects how big a loan a potential homebuyer can get.
In early October 2016, the interest rate on a 30-year mortgage was 3.42%, but during the week of January 5, that rate jumped to 4.2%—an almost two-year high, according to Fitch Ratings. So if the maximum loan a would-be buyer could afford in autumn was $120,000 (the current median mortgage for borrowers under 35, according to the Federal Survey of Consumer Finances), by last week that loan value would have dropped to approximately $109,000, assuming all other factors aside from the rate hike were the same, reported Fitch.
And the lower the mortgage amount that you’re approved for, the tougher it might be to make those picket-fence dreams a reality—something 83% of Millennials say they plan on doing someday, according to Trulia’s Housing in 2017 report.
But that isn’t the only thing preventing Millennials from buying real estate. Stagnant wages, heftier rents and mega student loan debt have all conspired to slow down the process of saving for a down payment. Also, stricter underwriting standards imposed by lenders after the housing bubble burst in 2008 means that potential owners need higher credit scores to secure a mortgage, reported Fitch.
It’s no wonder, then, that so many young adults continue to rent or even live at home with their parents. The homeownership rate for under 35-year-olds declined to 35% in 2016, from 39% in 2010, according to the U.S. Census Bureau. And for the first time in over a century, more 18 to 24 year olds live with mom and dad than with a partner or spouse in their own household, according to a 2016 Pew Research study.
If you’re like many Millennials and your current budget has made buying a home little more than a pipe dream, don’t throw in the towel and assume you’ll never be able to stop renting. Instead, prep yourself by considering these tips now, so when you are financially in shape to start the homeowner journey, you can hit the ground running.
Build all-star credit. The better your credit score, the better your odds of securing a mortgage and lower interest rate. With this in mind, make sure you pay all your bills on time, and start a plan to lower your credit card and student loan debt so that by the time you’re ready to buy, you’ll have a better debt-to-income ratio. Also, order a copy of your credit report and check it for mistakes. If anything is off, now’s the time to clear it up, before a lender sees it.