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Millennials finally embracing American Dream of homeownership [Detroit Free Press :: BC-REAL-MILLENNIALS-BIZPLUS:DE]

DETROIT - Chris Pawlowski, 26, packed up the dreams of many millennials when he moved into his condo in suburban Detroit this spring.

He wanted to put down some roots but he's still young enough that he really did not want to be stuck far away from the action. So he moved exactly where he did so he could keep enjoying his weekends hanging out with friends at nearby hot spots. And he's painted his kitchen a very bright Explorer Blue to make the place his own.

Pawlowski, who graduated from Oakland University in 2012, works for Ford Motor Co. as a business analyst involved with information technology systems. He wanted a reasonable commute to work. He didn't want something built in the 1960s or earlier that needed expensive repairs. He knew certain towns were out of his price range.

"The main challenge was basically finding something newer," said Pawlowski, who looked for more than a year and ended up buying a condo built in 1994.

Everywhere he looked, he'd ask: "Is this something I really want?"

For years, we've heard that millennials really don't want to become homeowners. Theories have included: They've got too much student loan debt to juggle a mortgage. Or they're too skeptical of the American Dream because they watched the massive foreclosures that hit when some were just in high school.

But while millennials aren't likely to do things the way their parents did, it's increasingly becoming clear that they aren't going rent or live in their parents' basements forever, either. Millennials are beginning to see housing as a way to invest and build equity now that home values have recovered after the housing collapse.

Diane Swonk, CEO of DS Economics in Chicago, wrote in a report in April that poor economic conditions - in addition to a surge in student debt - "delayed, but did not destroy, millennials' desire to eventually leave their parents' homes and start their own households."

"After years of staying put and sleeping on the couches of relatives, the younger population is on the move again," Swonk wrote.

The challenge, millennials say, is finding something that doesn't need thousands of dollars in updates. Millennials don't want to deal with dust, dirt and dated kitchens.

The spring homebuying season is expected to be one of the busiest and most competitive in recent years. Nearly 3 million first-time homebuyers are expected to enter the housing market in 2017, according to TransUnion.

And younger consumers will likely represent the majority of new homebuyers.

"They do aspire to be homeowners, even if they have not entered the market," said Jessica Lautz, managing director of survey research and communications for the National Association of Realtors.

While rising home prices in extremely robust markets make homeownership out of reach for some millennials, that's not the case in many Midwest markets such as the Detroit, Cleveland and Cincinnati areas.

"The optimism is highest in the Midwest," Lautz said.

Another important factor driving millennials into homeownership: They've got jobs - and in some cases pretty good jobs.

Mark Zandi, chief economist for Moody's Analytics, said job growth has consistently been stronger among millennials in recent years, compared with other age groups.

The millennial unemployment rate fell to 5.25 percent in April, down from 5.38 percent in March and 6.28 percent in April a year ago.

"Millennials' good job prospects should make them good homebuyers, despite the heavy weight of student loan debt this generation is struggling with," Zandi said.

Hilary Lynch, 27, said she started looking about a year ago to buy a home once she found a good job where she wanted to build her career. She works at Bosch Engineering North America and wants to keep working in the area.

Lynch, 27, said she was tired of renting and wanted something closer to work, too.

She was paying about $750 a month to rent the second floor of a house in the university town of Ann Arbor - which she says was "ridiculously low for Ann Arbor standards."

But she noted that her mortgage is $850 a month for the three-bedroom, 1,900-square-foot ranch she bought in February in a suburb closer to Detroit.

"My mortgage isn't much more than my rent," she said. "I'm building equity. I have a house that is four-times the size of my apartment. I can paint the walls whatever I want. I can make it my own."

Mortgage payments, given low rates, are still cheaper in many markets compared to rents, experts say.

Bob Walters, president and chief operating officer for Detroit-based Quicken Loans, said rents have been rising somewhat faster in many areas so millennials are finding that it makes economic sense to buy a home.

Lynch kept her payment low, as well, because she was able to put down 20 percent on the home that sold for $225,000.

She's been saving since she was babysitting as a teen. She graduated from Northwood University with no student loans because her parents offered to cover four years of college in Michigan.

Research by the San Francisco Federal Reserve Bank indicates that household formation, particularly among young adults, will expand between now and 2020. The U.S. Census Bureau projections imply household formations could average 1.4 million to 1.5 million each year through 2020. That compares with an average of less than 900,000 annually over the past five years, according to the Fed report.

Millennials are entering peak home-buying years, typically considered to be when consumers are between ages 25 and 45. This year, millennials are 20 to 36 years old. As they're having children, real estate experts say, millennials are moving to the suburbs, as well.

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Finding the right home in a time of tight inventories, higher mortgage rates and rising home prices in many areas won't necessarily be easy.

A well-priced home could get three offers or more in a short time frame.

Tim Gilson, associate broker for Keller Williams Domain and the Gilson Home Group in suburban Detroit, tells the story of a home that was priced at $150,000 around early April and had 58 showings in the first 36 hours. And within 8 hours, that home had three offers on the table.

Gilson likes to compare the competitive homebuying landscape to Olympic swimming meets where the winner is decided by milliseconds.

In a competitive situation, Gilson said, a buyer can have an edge if his or her lender is known for being nimble, such as some community banks or credit unions. Or if the buyer has a larger down payment - say 20 percent - and is willing to make up a certain amount of the difference if the appraisal ends up being lower than the home purchase price.

Someone who has a higher credit score, of course, is going to be able to more easily obtain a mortgage at a lower rate to obtain affordable payments.

Joseph Mellman, vice president and mortgage line of business leader at TransUnion, said while millennials are likely to enter the market, about 38 percent of millennials have subprime credit and will likely delay buying a home as a result.

"It's still quite rigorous to get a mortgage but compared to five years ago, it's starting to open up," Mellman said.

One risk is if mortgage rates shoot up more quickly.

Now that the economy has recovered, the Federal Reserve - which moved aggressively to shore up the nation's economy because of the Great Recession - is expected to begin unwinding a $4.5 trillion portfolio of Treasury and mortgage-backed securities sometime later this year.

Mortgage rates are vulnerable to spike at some point, if the Fed ends up quickly reducing the holdings of its mortgage-backed securities, Swonk said.

The average 30-year fixed mortgage rate is expected to climb to about 4.56 percent by year-end 2017 and then move to 5.51 percent by year-end 2018, according to Zandi, at Moody's Analytics.

That's up from an average of 3.45 percent in the third quarter last year. But it's still lower than rates in the 6.5 percent range back in 2006.

"Nobody likes the mortgage. They want to buy the house," said Mat Ishbia, CEO of United Wholesale Mortgage, based outside Detroit.

But Ishbia said many millennials could benefit from researching their mortgage options first before shopping for a home.

He noted that the Fannie Mae HomeReady program only requires 3 percent down for creditworthy low-to-moderate income borrowers. The Freddie Mac Home Possible programs can require 3 percent or 5 percent down, depending on the program, for low- to moderate-income buyers or buyers in high-cost or under served communities.

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The National Association of Realtor's said its research indicates the median down payment for first-time buyers has been 6 percent for three years. The median down payment for repeat buyers has been 14 percent in three of the past four years.

But many potential homebuyers often say a down payment of 10 percent or 20 percent is necessary. Some lenders, say that's not so.

Pawlowski said he didn't want to give up having some spending money for fun so he put down 20 percent on his $240,000 condo.

He said he had the money because he saved and didn't take out any student loans. He was awarded a scholarship in his final year of school. And his parents helped with college. Their strategy included buying a condo that was in foreclosure so Pawlowski could live there when he was going to school at Oakland University. He lived at home for a while after the condo was sold to save more money.

He's happy he was able to buy the condo, built in 1994, for $240,000 when it was originally listed at $260,000.

"I got really lucky with this one," Pawlowski said.

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