We imagine there are millions of American millennials who have made it through college, found a job, got married and would like to take their next crucial step on the way to adulthood: Buying a home. There's only one problem: Thanks to stagnant wages and onerous student loan debt (factors that have helped jack up spending even as incomes have languished) most millennials don't have any money.
Indeed, for the first time ever, millennials with student debt now have a negative net worth.
While most Americans borrow when buying their homes, millennials can't even afford the down payment that lenders typically require so that their customers have some "skin in the game."
Yet, while most lenders view this fact as a risk (borrowers typically need to put up 20% of the price), a growing number of enterprising lenders see these broke borrowers as an opportunity. The latest example of this ill-advised trend was highlighted by the Wall Street Journal on Friday, with the absurdity inadvertently laid bare by WSJ's social media team.
This will end well. pic.twitter.com/vaATQP16I9— Lord Single Malt (@Singlemaltfiend) June 29, 2018
As WSJ explains, enabling millennials to buy homes they can't afford risks igniting a re-run of the housing crisis - an outcome made more likely by the fact that home prices have already surpassed their excesses from the pre-crisis era. The phenomenon has been exacerbated by a shortage of homes that has persisted for years.
But what's even more alarming than the fact that lenders are out there chasing this business (despite the fact that nearly 40% of renters ages 25 to 34 said they save nothing every month for a down payment) are the schemes that some lenders have devised to help their borrowers "fund" their down payments.
To wit, CMG Financial created HomeFundMe, a service it launched last year. As its name would imply, HomeFundMe helps would-be borrowers beg for cash from their friends and family by sending passive aggressive emails.
Reese and Kyle Rademacher weren’t sure how they would afford a down payment to buy a home until their real-estate agent mentioned an offbeat idea: crowdfund the money from friends and family.
Mrs. Rademacher, a 28-year-old construction technician, set up an online profile with a program called HomeFundMe to solicit donations. Her parents and a few others responded, and in March the Rademachers closed on a $320,000 home in Cheyenne, Wyo.
HomeFundMe, a service launched by lender CMG Financial last year, is among a growing suite of services that help borrowers cobble together the funds to buy homes. These companies -- startups and established players in the housing market alike -- say they’re offering options for borrowers who have good credit and income but are struggling to save.
About 400 borrowers have used HomeFundMe to help buy homes since the program launched in October. On average, they raise about $2,500, though CMG also can kick in matching grants, and most borrowers have some of their own money saved as well, said chief marketing officer Paul Akinmade. Friends and family can also make their gifts conditional, meaning borrowers won’t get the money unless they actually purchase the home.
Mrs. Rademacher said she felt uncomfortable at first asking for help through HomeFundMe. But the Rademachers’ budget was tight after paying for their wedding, and a credit union had already denied their mortgage application because they didn’t have enough in savings.
"Whenever I emailed people the link, I would explain, 'This isn’t fake, this is real,'" Mrs. Rademacher said. Now, some of her friends are interested in following suit. "It just worked out so well,” she said, “that people were like, ‘No way, I want that!'"
One startup lender called Loftium will supply $50,000 for a down payment, on the condition that the homebuyer agrees to rent out a room a Airbnb.
Erik and Rafaela de los Reyes considered applying for an FHA loan to buy a home in Seattle but were put off by the mortgage insurance and other costs. They instead got $28,000 from Loftium, the startup that offers funding in exchange for a cut of their Airbnb income. The couple have pledged to rent out their mother-in-law suite for three years.
"If you don’t have the down payment, it’s a great way to start," said Mrs. de los Reyes, a 29-year old flight attendant. She and Mr. de los Reyes had never been Airbnb hosts before, so they were apprehensive. But as for their guests, Mrs. de los Reyes said, "we barely see them."
Yifan Zhang got the idea for Loftium after renting out a spare room in her Seattle home. One of her goals, she said, is to even the playing field between millennials whose parents can help them buy their first home and those who are trying to save on their own.
"If you’re willing to kind of sacrifice and generate this extra income, then you should be able to have this leg up in homeownership," said Ms. Zhang, the company’s CEO and co-founder.
Perhaps these lenders have forgotten the most enduring lesson from the financial crisis: When borrowers don't have "skin in the game" - ie they're playing with "other people's money" - they're much more likely to walk away when home prices fall.
Economists caution that actions such as loosening credit standards or supplying borrowers with more down payment money worsen the problem by creating more demand in a supply-constrained market, leading to a further overheating of home prices. And if home prices later fall, borrowers with little of their own money invested are more likely to simply walk away, they say.
These aren't the only options for young people. And as we've previously pointed out, Freddie Mac recently revised its "3% down" mortgage program to eliminate pesky income restrictions and geographic restrictions allowing a new wave of "income-challenged" Americans to rush into already-hot housing markets. The Federal Housing Administration has a similar 3%-down program.
Then again, while some people are turned off entirely by the GoFundMe concept, the idea isn't so hard to rationalize: Why shouldn't boomers pitch in to help millennials make their down payments? After all, they're the ones who wrecked the economy and the housing market, right?