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As millennials begin reluctantly crossing the bridge from youth into adulthood, conversations about buying a home become more and more frequent. Concerns about the cost of rental fees and general living expenses –– especially in expensive metropolitan cities –– are high enough to convert even the most devoted of apartment dwellers.
As more young people increasingly trade in their skyline views and landlords for a mortgage and some backyard space, housing confidence is at an all-time high. But how can we quantify something as subjective as confidence? Enter the Housing Confidence Index.
The Housing Confidence Index
Each month, the Federal National Mortgage Association –– commonly known as Fannie Mae –– conducts the National Housing Survey (NHS). The NHS is the first scientific study of its kind, used to create a systematic analysis of current consumer views about the state of the housing market.
In this survey, representatives from Fannie Mae contact 1,000 individuals at random to ask over 100 live survey questions. These questions are wide ranging and cover topics including personal finance, housing, and job security. The results of the survey are compiled to determine the Home Purchase Sentiment Index (HPSI), referred to colloquially as the Housing Confidence Index. These results are presented in the form of yes-or-no beliefs statements with corresponding percentages:
- I believe it is a good time to buy
- I believe it is a good time to sell
- I believe home prices will go up
- I believe mortgage rates will go down
- I am not concerned about losing my job
- My household income has increased in the last 12 months
At first glance, these statements and their results may not seem particularly scientific, but remember that this survey is not intended to report on the state of the actual housing market, but rather the state of consumers’ confidence in it. Several mortgage, lending, and real estate companies –– including Zillow –– have attempted to follow in Fannie Mae’s footsteps by creating their own version of this survey, though none have succeeded in engineering something quite as widely used or impactful.
The Housing Confidence Index, April 2018
The results of the April HCI rose 3.4 points to 91.7 percent, the highest rating ever, and up 5 points from April in 2017. Here are the individual results of the April 2018 survey, as reported by Fannie Mae:
- The net share of Americans who say it is a good time to buy a home decreased 3 percentage points to 29 percent.
- The net share of those who say it is a good time to sell rose 6 percentage points to 45 percent, reaching a new survey high.
- The net share of Americans who say home prices will go up increased 7 percentage points to 49 percent in April.
- The net share of those who say mortgage rates will go down over the next 12 months increased 4 percentage points to 48 percent.
- The net share of Americans who say they are not concerned about losing their job increased 5 percentage points to 76 percent in April.
- The net share of those who say their household income is significantly higher than it was 12 months ago rose 1 percentage point to 18 percent.
Across the board, consumer confidence in housing rose from March to April, with the exception of one category: Americans who say it is a good time to buy, which dipped by 3 percentage points. It would be fair to wonder how housing confidence can be so high when an increasing number of people feel that it isn’t a good time to buy a house, but these attitudes have many variables attached to them. In this case specifically, we might be able to connect increasing apprehension to purchase a home with rising housing prices, which also correlates directly with the growing belief that it’s a good time to sell; as with the housing market itself, this survey is cyclical.
What Increased Housing Confidence Means for Millennials
From March 2017 to March 2018, home prices in the United States spiked by 7 percent, the biggest bump in four years. That means that home prices are increasing at a much greater rate than income levels. On its own, the Housing Confidence Index growth may seem like a good thing, but it has its fair share of potentially negative implications –– especially for millennials.
Millennial homeownership rose for almost all of 2017, but for the first quarter in 2018 it took a hit. A fiercely competitive market, limited inventory, and increased seller confidence has led to skyrocketing housing prices. Millennials, who often have less capital saved due to the aforementioned high cost of living, can be losers in this market. In addition, they are often first time home buyers, who lack the experience –– and the earnings from selling a first home –– to adequately keep up with some of their older competitors. It certainly doesn’t help that millennials want to stay in the metro cities they’ve been renting in, which generally go hand in hand with higher down payments and even more competition.
The best thing millennials can do in this lucrative market is to create a home-buying strategy. Downsizing to a smaller apartment or taking on a side hustle are great ways to increase income to build or add to an existing nest egg. Millennials should also consider amending their home buying wish list, like considering living in a nearby suburb to the metro area of their choice.
Also, putting money towards small investments that will save you money later on is a great way for millennials to get a foot in the door for more savings down the road. For example, if purchasing a home does work out for you, consider investing in small precautionary measures such as a home warranty. This way, you pay little money out of pocket every month and you will save large amounts of money every year in home maintenance costs. Unexpected repairs and/or replacements of major appliances are expensive, and if you have a home warranty to take care of that for you, you won't have to worry about the extra costs and you can put that saved money towards other things.
For home buying, it's important to note that if you have a strong credit history and a good lender, it’s always an option to put down a lower percentage down payment and pay Private Mortgage Insurance (PMI). PMI gets a bad rap, as it increases monthly payments to protect the lender from liability. But, if you are able to reach 20 percent down after the first year of purchasing your home, PMI can be removed via refinancing. Most importantly, millennials should be realistic about what they can afford to pay for a house.
While Housing Confidence is getting stronger every day, confidence in your ability to become a homeowner doesn’t have to shrink. By making sacrifices, setting goals, and staying up to date on market trends, it is possible for millennials to save enough money to be competitive with other buyers with better budgets, and to realize their ambitions of purchasing a home in even the toughest of housing markets.