Will Millennials Continue to Buy Homes If Mortgage Rates Keep Rising?

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Have you seen mortgage interest rates in 2018? They are nearly a point higher than a year ago. If you buy a home, you will pay more money each month to pay your mortgage. The higher costs of home ownership in 2018 have many people wondering if millennials will continue to buy homes if the rates keep going up.

As of spring 2018, the data suggests that this has not been a big problem – yet. According to Ellie Mae’s Millennial Tracker, purchase mortgage loans made to millennial mortgage borrowers rose month over month in February and March 2018.

millennial home buyers

Approximately 83% of the loans that were made to people in this age group in February were to buy a home. This was an increase of 2% from the month before but it was down 3% from a year earlier. Interest rates that month were in the range of 4.4%, which was the highest since June 2014, but rates since then have gone up to around 4.6%.

But experts say that for the most part, even with rising interest rate, millennial borrowers have continued to buy homes, as they represented 45% of the loans made in February 2018. For millennial homebuyers in February, the average loan amount for men was $199,300, while for women it was $189,000.

Other data from the spring also suggests that millennials are still wanting to buy homes with higher interest rates because of the increase in rents. An online survey of 1000 active millennial buyers done in March 2018 by Realtor.com found that 23% stated that increasing rents was a reason for them to go ahead and buy despite rising rates. Realtor.com stated that rents had increased in 85 of the top 100 markets, including nine cities where rents had increased by double digits from 2017.

Another factor, according to some financial experts, is that millennials are growing older and getting ready to settle down and have a family. While rates are going up, so are prices. It appears that this trend will continue beyond 2018 and into 2019 and maybe beyond. Many mortgage watchers believe we will see 5% mortgage rates in the next year. If that is the case, it will be cheaper to get into a home now than to wait.

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While there has been this idea that millennials are opposed to buying homes, after they saw what happened to their parents during the last down turn, this was always somewhat of a myth. It is natural for younger people to want to rent and to stay mobile when they are in their early and mid-20s and do not have children. But most people eventually want to have families and want to live in a home of their own in a neighborhood with other families.

Another factor in millennials still buying homes this year is the economy is simply getting better. We are seeing growth rates in the 3% or more range, according to recent data. Also, the unemployment rate across America is only 4%, which is the best it has been in years. The labor market has also shown strong signs of getting tighter, and wages are rising at almost 3% per year, which is the fastest rise since 2009.

The Fed has been raising its key interest rate as well, which it has done several times in the past year. More rate hikes are promised. This is what the Fed often does in a rising economy to ward off inflation. Millennials are smart and educated and know this. Thus, buying a home now even with higher rates will probably be cheaper than waiting a year or two. It is expected that interest rates will continue to go up.

According to Forbes, the tendency to continue to buy homes is occurring in other age groups as well. Rising rates are spurring more and more buyers of all ages to lock into a deal this year, even if the price and rate is not as low as they want. Financial experts argue that rising rates can cause this type of demand, especially for the first-time buyer with a limited down payment. Higher rates will also push more uncertain possible buyers into the market.

At some point, the higher rates may cause millennials and others to hold off from buying, but we have not seen that happen as of mid-2018.