Millennials, Mortgages, and the Housing Market

Is this a good time to purchase a home? Here's a look at what's going on with the housing market these days.

In this video segment, Sean O'Reilly, Gaby Lapera, and Vincent Shen talk about what Quicken Loans' Super Bowl ad indicates about the current state of the market, how housing has picked up since the recession, and the unsettling ways credit unions are trying to push mortgages on rental-favoring millennials.

A full transcript follows the video.

This podcast was recorded on Feb. 9, 2016. 

Sean O'Reilly: So, Gaby, Vince, and I have been anxious to talk to you about what's going on in housing and mortgage lending. This is obviously a huge part of the economy, and affects an even bigger portion of the economy, because once you buy a house, you need, I don't know, a new TV, furniture, maybe even a dog. So, is housing back since the Great Recession? How hard is it to get a mortgage? I saw that Rocket Mortgage thing during the Super Bowl --

Gaby Lapera: I think everyone did (laughs).

O'Reilly: Yeah. Boy, they really struck a populous tone with that. They were like, "We can make America better!" (laughs) 

Lapera: I was talking to someone else in the office the other day, and they were like, "I thought it was a commercial for The Big Short. That's what I thought it was for." (laughs) 

Vincent Shen: It was a little bit concerning, how nonchalant they made the idea of, "I'm going to just click this button on my smartphone --"

O'Reilly: Oh my God, yeah.

Shen: "-- and get a mortgage." It was a little bit concerning how they make it seem like this trivial matter, when it's not. At all.

O'Reilly: A $400,000 purchase should not be trivial. (laughs) 

Shen: Exactly.

Lapera: Yeah ...

O'Reilly: Gaby, can I still buy a mortgage-backed security if I want? Because I really want to. (laughs) 

Lapera: You just want one mortgage-backed security? (laughs) 

O'Reilly: I'm just kidding.

Lapera: I don't even know how you would go about doing that (laughs). But, yeah, mREITs are always an option. mREITs are mortgage real estate investment trusts. I don't know if you guys ever talked about this, so I figure I'm just going to spell out everything --

O'Reilly: No, go nuts.

Lapera: -- what all the acronyms are.

Shen: I think that makes sense, we do not delve into that realm very often.

Lapera: So, the housing market in general, right now, it hasn't reached pre-recession levels. I think, back then, home ownership rate was around 69% in like 2005.

O'Reilly: It's in the low 60s now, isn't it?

Lapera: It's in the low 60s. And I think the lowest it ever got was like in the 50s. But, it has gone down from last quarter. The one thing we are seeing a lot more of, though, is renting. If you --

O'Reilly: Said the three Millennials sitting at a table doing a podcast. (laughs) 

Lapera: (laughs) It's true, it's true, especially among Millennials, that's the group you're seeing doing the most renting, because, I mean, down payments on houses are expensive. I don't know if --

O'Reilly: And, I mean, correct me if I'm wrong, the rule of thumb with home ownership is, you should buy a home unless you're planning on staying in an area for 5-6 years. I don't know about you, but since leaving college, I moved ... 1, 2, 3, 4, 5, 6 times? (laughs) 

Lapera: Yeah, it's a minimum of 5 years. What a lot of people don't think about when buying a home is all the closing costs involved. So, in order for that to average out, you need to stay --

O'Reilly: It's $5,000-10,000, minimum.

Lapera: Yeah, you need to stay for 5 years in order to recoup your losses when you sell your house again, assuming that your house goes up in value (laughs).

O'Reilly: Which is a dubious assumption (laughs).

Shen: So, you guys mentioned Millennials, obviously younger people, I can understand, starting their careers, building out their net worth and their savings in order to handle some of these down payments, it's difficult. 20% even on a $200,000 home, I think the median or average in the U.S. is like $150,000, it's still a pretty decent chunk of change. But, you sent me an interesting story that I read from the Bay area, Gaby, about ... I don't remember what they called it ...

Lapera: It's like zero-down home loans.

O'Reilly: Oh, that's right!

Shen: Then, it was variable interest rate, too! What were you saying? I was like, (laughs) why are we doing this again?! It's been 7 years!

Lapera: Yeah, so, this is the San Francisco Credit Union. The homes in San Francisco are very expensive.

Shen: I think it's an average of $1 million.

Lapera: Yeah. So, to get a down payment for that, 20% down, that's $200,000. And even for people who are working in the tech industry there, that's very, very expensive. So, there's this credit union saying, "We'll let you get a home loan for 0% down." And they're saying, "Don't worry, our standards are super stringent." But you look at it and it's a variable rate, which is not great. You really want a fixed interest rate if you're getting a mortgage. A 30 year fixed interest rate, probably the lowest it's going to get.

O'Reilly: Well, it's even worse, because the Federal Reserve just increased interest rates for the first time in a while, and supposedly, they're going to keep going.

Lapera: Right, yeah. I don't think they're going to super duper accelerate that, though. And interest rates are at a historical low, they're so, so low right now. It's still almost negligible (laughs). But, that doesn't mean that in 30 years, when you're still paying off this house, maybe interest rates are a lot higher and suddenly you're paying off a lot more in interest a lot later. Also, like Vince was saying, it does seem generally on its face like a bad idea. If you can't even come up with a little bit for the down payment, what are you doing buying a house? You know?

O'Reilly: It's bad.

Lapera: And I'm not sure, but I'm pretty sure those must come with PMI, which is private mortgage insurance, which is basically what you have to pay on a mortgage on top of a mortgage.

O'Reilly: Unless you put, what, 20% down?

Lapera: Unless you put 20% down, that's exactly right.

O'Reilly: I remember a couple of primary mortgage insurers. This was back in my first-looking-at-the-stock market days. But, a couple of primary mortgage insurers -- in fact, all of them -- went under. There was actually PMI Group, I think, I'm pretty sure they're gone. What's going on in that industry right now?

Lapera: Honestly, I have no idea. The people in my bureau, the financials bureau, sat down yesterday and tried to find a PMI provider, and it is incredibly difficult to find one. It looks like the banks are the ones providing it.

O'Reilly: And they're just charging the money and self-insuring or something.

Lapera: Yes.

O'Reilly: PMI Group is bankrupt, yeah, they're gone.

Lapera: Which is, oh man, and the 2008 recession, just a little road bump for them. (laughs) 

O'Reilly: And I know a new company got formed, and this is reaching in the cobwebs of my mind, but I know George Soros left and helped create one, and they're going to have an IPO, and I just found Radian Group (RDN -1.47%), they are finally starting to make a little bit of money, but they were almost bankrupt in 2011. Anyway. (laughs) I think they just did a reverse stock split, too. I would think that industry would be super profitable now, though, because everybody's like, "Oh, wow. The whole industry just crashed, we can actually charge money for the insurance now."

Lapera: Yeah, and I mean, property values are going up in certain areas of the country. So, eh. And the thing with PMI is, if you can avoid PMI, that is really ideal, because one, you're paying extra money, two, they're super hard to cancel. You go online and look for how to cancel PMI --

O'Reilly: Game over.

Lapera: -- and it's just people complaining, "I have no way of cancelling this, I've tried for a couple years now." So, if you can avoid it, I would highly recommend it.

O'Reilly: Putting the money down. So, for all of our Consumer Goods investing listeners, who obviously might own shares in a Home Depot or Lowe's or something, sounds like housing's not Gangbusters, but it's not bad either?

Lapera: Yeah. It's chugging along. Technically, it went down last quarter. But like ...

O'Reilly: It's a quarter, it doesn't matter.

Lapera: Exactly.