Millennials’ supposed lack of interest of becoming homeowners is often blamed for the market’s slowing recovery, but some experts say the generation shouldn’t shoulder all of the fault.

Anthony Hsieh, founder and CEO of mortgage company loanDepot, says lack of innovation and too tight regulations are draining the housing market’s revival.

“Private capital is not back into the mortgage marketplaces, and this is seven years after the crisis,” he says. “Credit has not been widened or deepened, and there isn’t enough product innovation to offer loans to this generation. The only programs are still regulated very tightly by the government.”

He adds that the private mortgage market is currently $1 trillion, falling short of the $1.5-$2 trillion market in normal condition. “It’s too small of a marketplace to meet the needs of first-time buyers. In 2003, fresh mortgage originations was a $3.9 trillion market.”

Strong investor activity, low interest rates and improving home prices and confidence fueled the market's recovery starting in 2012 after it collapsed in 2008. Last year, home prices were up 11.3%, according to the S&P/Case-Shiller Home Price. But the recovery has become more uneven this year-with some worried it’s on the brink of stalling as data from the market continues to come in mixed.

In June, new home sales fell 8.1%-- the slowest pace in three months as sales of previously-owned properties rose 2.6%. During the same month, home construction fell 9.3% to the weakest level since September 2013 despite home-builder confidence sitting at a six-month high. In May, mortgage applications were down 21% from the same time a year prior.

New regulations passed in the wake of the housing crash carry stricter requirements to be labeled as a qualified mortgage, including a 43% debt-to-income ratio, a good credit score and a sturdy proof of income.

“We can’t control the underwriting, there isn’t much we can do about it,” says Hsieh. “We are a very large lender, but we are puppets to the program guidelines, we aren’t encouraged to deviate with our originations. They say we can, but lenders are petrified of getting in trouble with Fannie and Freddie.”

The millennial generation, which is bigger the baby boomer generation and is the biggest cohort of first-time buyers, has been largely absent in the housing market for various reasons: record student loan debt, high unemployment and underemployment, stagnant wages and a general disinterest of moving to the suburbs and taking on the responsibilities of homeownership.

“The big question mark is how long they put off entering the market,” says Keith Gumbinger, vice president of HSH.com. “If these first-timers don’t come in, that means the train can’t get underway. No one can sell and move up and on, the demand home prices rely on goes away and rents will continue to rise.”

He says the mortgage market needs to be more adaptable and innovative, explaining that historically, housing crashes are followed by new product offers like short-terms ARMs, reset mortgages and subprime mortgages that have fueled the recovery. “It’s not just the new regulations that are keeping innovation back. Investors have watched trillions of dollars burn up, every time you see a lawsuit go out the door, someone is eating that money and making them more nervous to get into the market.” Last week, Bank of America (BAC) announced a $17 billion deal with the Department of Justice to resolve allegations of mortgage-related misconduct.

Stephanie Karol, IHS Global Insight economist, says the current income and job growth doesn’t make the near-term outlook rosy for millennials. She says the employment population ratio for those ages 35-34 paints the best picture: at the end of 2006, the ration for men was 88.2% and 70.9% for women. Those ratios dropped at the end of May to 79.8% and 68.7%, respectively.  Now, men are at 83.2% and women are 83.2%.

Lack of millennial participation in the housing market will ripple throughout the economy and their own personal finances, she adds.

“The returns to purchasing a home in how it feeds into GDP are a lot greater than renting a house.” 

What’s more, she says, a large population of non-homeowners will widen the wealth and equality gap in the U.S. “If they can’t get into the game, then you are locked out of the best and most time-honored way we have of building wealth as Americans. So those millennnials that are able to get in will have a significant advantage.”

It’s also common for parents to take out home equity lines of credit to help pay for their children’s college, a backstop that wouldn’t be available to renters. “IF the homeownership rate is permanently depressed for this age group, then it’s going to be difficult for their children to get an education without taking on a ton of student loan debt.”

The “non- committal” stereotype often placed on millennials for also delaying marriage and moving around more than previous generation isn’t necessarily fair, Karol argues. “This generation has the internet. They are able to see what possibilities are out there in a more tangible way than generation that came before. You can now sit in Boston and decide to move to Portland and find a job and line up an apartment from the comfort of your couch.  That is really significant the perception of how many possibilities are open creates choice paralysis”

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