Whenever a brand-new President begins piecing together their administration, it’s a tough call as to what, exactly, that means to the U.S. economy – and home buying and selling.
Given the fact we’re still in slow recovery mode after the cliff dive the economy took in 200/2008, it’s little wonder that many Millennials are feeling the pinch when it comes to purchasing a home.
But it’s not just the Millennials.
Though much of the news blasts focus on Millennials in their headlines, we need to keep in mind that there is a blurry cut off point between two generations: Generation X (Gen X) and Millennials.
The Tale of Two Generations
Let’s dive a bit into the numbers. Many who draw a line in the sand and say “this is the Millennial generation” use the years 1980-2000, meaning if you were born within that time span, you’re a Millennial. Meanwhile, Gen X is generally considered to be children born between 1965 – 1979.
Why is this significant?
There are six more years of birth statistics included for the Millennial generation. No one seems to point this out when they say that Millennials are the largest in size since the Boomers. If you have years more years of births, then, of course, you’ll be larger in population size.
The point here is that Presidential politics and the slow economy are affecting both the Generation X and the Millennial generations. Are there different significations for each generation?
Yes. But they are marginal.
Since our focus is how Trump’s economy may affect home buying, we’ll look at how Gen X and Millennials compare in terms of credit scores (one of the main issues with being able to purchase a home) and spending patterns.
TransUnion – one of the Big Three credit reporting agencies – recently published a credit score and spending comparative between Millennials, Gen X, and the Boomers. Even though the Boomers are still alive and kicking around (as well as spending money), we’re leaving them out of this discussion.
Subprime credit scores (if your credit score is between 550 and 620, then you fall into this category):
- 43% of Millennials
- 33% of Gen X
As you get older, your credit score tends to improve. Plus, Millennials are being lumped in with 18-year-olds who aren’t known for being credit savvy (which further supports the questionable cut off points for each generation). Gen X has had several more years of navigating the murky waters of attaining a solid credit rating.
The gap between Gen X and Millennials closes when we look at debt versus available credit. Both generations use over 70% of the credit that is made available to them through the various loan types – auto, mortgage, credit card, personal, etc.:
- Millennials: 79%
- Gen X: 77%
Also, when it comes to the types of credit used, Gen X and Millennials run neck and neck in all categories except one: mortgages.
- 29% of Millennials
- 31% of Gen X
- 27% of Millennials
- 24% of Gen X
- 14% of Millennials
- 35% of Gen X
What Does This Have to do With Trump?
Most of us don’t have 20% as a down payment for a home. When we dive back into a little bit of math and consider that the median home price in the U.S. is $228,400, 20% of $228,400 is $45,680. Do you have that much sitting around in a bank account for a down payment? Most likely, no. So, conventional home loans may be completely out of the question for most of us.
Also, home prices aren’t decreasing; in fact, they’re increasing. Add to this that The Fed is likely to enact another interest rate hike (which funnels down into an increase in mortgage interest rates), and affordable housing for both generations is inching out of reach.
Now, presidents do select the Fed’s Board Members – who decide on interest rate increases or decreases – but the decision makers need to be approved by Congressional action. The current Fed Chairperson, Janet Yellen, was confirmed under Obama. So, it’s not entirely accurate to say that Trump is directly connected to The Fed’s decision to increase interest rates.
There is an indirect economic decision-making path that points back to Trump. Since his election in November 2016, the stock market has made dizzying monetary gains, the jobless claim has hit the lowest level in 44 years, and small businesses are more optimistic than they’ve been in the prior 12 years.
Without getting too deep into the complicated mathematical factors regarding Fed Interest Rates, when the economy is on an upswing, the Fed tends to raise interest rates to prevent inflation. Admittedly, economists would argue that statement is an oversimplification. But, it’s still true.
Supply and Demand Still Dominates
However, when it comes to housing prices, that’s not necessarily a Trump issue; it’s a supply and demand issue.
We have more generations in the home buying pool, and this includes foreign real estate investors. San Francisco, Los Angeles, Seattle, and New York (to name just a few), are metropolitan areas with high demand for housing, which bumps housing prices. As wages increase and unemployment decreases, there is a greater likelihood of more people needing, or wanting, to purchase a home.
Yet, if you’re a Millennial or a Gen X’er with a subprime credit score, it will be a challenge to secure a mortgage. You’re competing for a lender’s cash with a pool of other possible borrowers who have better credit, access to a larger down payment, and more attractive debt to income ratio (especially if they are Boomers).
Therefore, you can’t lay the blame of low housing inventory and Fed rate hikes entirely on any President.
Furthermore, there are federally insured loans available through the Federal Housing Administration, the Department of Veteran’s Affairs (if you’ve served in the military), and the United States Department of Agriculture (for those of you who don’t mind living in rural areas). As such, it’s the individual’s responsibility to:
- Maintain an optimal credit score (and FICO gives you information about how to do just that)
- Find a lender who offers the best terms on a mortgage loan
- Figure out how to secure a down payment (federally insured loans often have down payment requirements as low as 3.5%)
At this time, there have yet to be any large-scale changes to the non-conventional mortgage loans that the federal government offers. Should the Trump bump in the economy continue, interest rates are likely to rise.
On the flip side, your wages may also increase. If that’s the case, it’s a wise decision to pay down any credit cards or auto loans you have. Save as much cash as possible – indeed, the Fed rate hikes benefit savers more than spenders. This will help boost your credit score, bump the amount of savings you have for a down payment, and make you a hefty contender in the home buying marketplace.