1752-123_Cool_Solutions_First-time_Home_Yers+%282

COOLSpecial Report

S O L U T I O N S

A G u i d e f o r C r e d i t U n i o n s

They’re as big as the boomers.

They like fi nancial services

Custom-fi t, Online, and

Outrageous. And, oh yeah,

they’re fi ercely Loyal!

Filene Research Institute

P.O. Box 2998, 5910 Mineral Point Road

Madison, Wisconsin 53701-2998

608.231.8550

www.fi lene.org

1752-123(09/06) ISBN 1-932795-04-9 © FILENE RESEARCH INSTITUTE

FIRST-TIME HOME “Y’ers”

C O O L S O L U T I O N S2

Tammi S. Feltham, Ph.D., is an associate professor in the Faculty of Human Ecology at the University of Manitoba. Feltham obtained a B.S. (1983) in Business Administration and Management, and an M.B.A. (1984) from the

University of Montana, Missoula. She obtained a Ph.D. (1990) in Marketing and Organizational Behavior from Queen’s University, Kingston, Ontario. Feltham has taught consumer analysis, and introductory management and marketing at the undergraduate and

ACKNOWLEDGEMENTS

The Filene Research Institute would like to thank PSCU Financial Services, the nation’s largest CUSO, for its generous fi nancial support of past, present and future studies of the under-30 population and the potential that young adults represent for the continued success of the credit union community.

ABOUT THE AUTHOR

The Filene Research Institute would also like to acknowledge Jim Jerving and Dick Radtke for their editorial contributions and David Smith from Pepperdine University for his counsel and advice.

We extend a special thanks to GECU, Great Wisconsin Credit Union, Truliant Credit Union, Andrews Federal Credit Union and First South Credit Union for allowing our research team access to their membership for data collection purposes.

graduate levels. Her research has appeared in the Journal of Consumer Psychology, Journal of Consumer Marketing, Advances in Consumer Research, Journal of Small Business Management, isuma: Canadian Journal of Policy Research, and Marketing Management Journal.

C O O L 3S O L U T I O N S

FIRST-TIME HOME “Y’ers”C O O L S O L U T I O N S

Executive Summary and Commentary

Introduction

What This Study Means to Credit Unions

Home Buyers’ Age & Profi le

When & Why Did You Buy?

Moving In or Out

Buying Satisfaction

Seeking Information

Finding Realtors via Word of Mouth

Speed is the Answer

First Home Financing

Realtor as Information Broker

Seeking Mortgage Information

Banks & Mortgage Brokers Win the Prize

Quality of Information

Home Improvement

The Next Buy

Home Importance

Concluding Thoughts

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Executive Summary and Commentary By George A. Hofheimer, Director of Research

By now, you probably know the Filene Research Institute is keenly interested in the Gen Y demographic. Since 2004 we’ve published numerous studies and spoken to thousands of credit union leaders about the need for credit unions to effectively reach out to younger generations of consumers. As my colleague Mark Meyer pointedly states, “Credit unions today have a problem. In 2002, 18- to 24-year- olds made up 10% of credit union membership. In 2006 that number dropped to 6%, according to the Credit Union National Association. In recent years, credit union membership and loan growth have sputtered. Interest income is sagging and the average member age is up to 47.”

One way to reverse this trend is to study Gen Y’s behaviors and preferences during key financial events in their lives. Previously we examined their first credit card and first used-car purchase.

This particular study involves the most important financial purchase most individuals ever make: the first home. Many consider home ownership to be the most tangible manifestation of the American Dream. Indeed, the home is the largest and most important asset for nearly all consumers.

In the study that follows, University of Manitoba Professor Tammi Feltham logically lays out the motivations, experiences and levels

of satisfaction of young adults’ first home purchases. You will discover a variety of opportunity areas to guide your credit union to be well-positioned to serve the next generation of home buyers. Although credit unions are relative newcomers to the mortgage game, this study illustrates that first-time home buyers find the mortgage process to be complex and confusing, and they are in need of more informed mortgage providers.

C O O L S O L U T I O N S 5

IntroductionIt would be difficult to overestimate both the meaning and value of home ownership for Americans, the economy and our culture. A home is the largest and most significant investment consumers will typically make. Mortgage lending and home equity loans have fueled the expansion of the U.S. economy for the past several years.

The home is the center of family where life’s joys and tribulations play out in a daily ritual. Home and family are inseparable; indeed, the truisms resonate—there’s no place like it and home is where the heart and hearth reside.

Over the past serveral years, the roles of both the home and the credit union have evolved. Consumers are using the equity in their homes to fund purchases that savings formerly financed. The personal savings rate dropped into negative numbers in 2005 for the first time since the Great Depression. The savings rate for that year was minus 0.5%, according to the U.S. Department of Commerce.

The credit union industry, though, is a Johnny-come-lately to the mortgage market; they first received the regulatory authority to offer 30-year mortgages in the late 1970s. Unlike auto lending, where credit unions had 18.4% of the U.S. market share at the beginning of 2006,1 credit unions have remained poor cousins at the mortgage table with a slim 2.18% of originations in 2005.2

Today, credit unions are viewing the mortgage market with a heightened sense of necessity. The credit union return on assets has been steadily declining since 2002 to under 1%, and membership growth is slowing and graying at the same time.

Gaining new members and loans—especially via young adults—with their mortgages is essential for credit unions to remain healthy and relevant in the 21st century.

The numbers tell us that home ownership will continue to grow in importance. Over the past 30 years, housing prices at the national level have grown at about a 6% annual

rate.3 During the same time period there has been a steady increase in the percentage of home ownership in the United States. In 1975, 63.4% of Americans owned their homes; by 2005 that increased to 69%.4

If an automobile is the vehicle that transports consumers to the richness of the American Dream, the home is the destination and the place where the American Dream is domiciled. Like any costly purchase, the home buying experience is a decision that involves the right and left brain, emotions and logic. Financial institutions need to capture both the hearts and minds of consumers to be successful in the mortgage market.


What This Study Means to Credit UnionsIn the fall of 2005, we talked to 206 young adult credit union members (ages 24- to 34-year-olds)—53% male and 47% female—of five credit unions, about their experiences in buying and financing their first home.5 The key findings include:

• The realtor plays a pivotal role in all aspects of the home buying experience. The realtor is the information broker for locating, purchasing and financing a home. A realtor was mentioned as “most influential” by 50% of respondents in the search for a home. A realtor provided information on financing 78% of the time and gave a recommendation for financing 60% of the time.

• People want face-to-face interactions at all stages of home buying. They will

look at Web sites for information, but rely on the realtor, family, colleagues and friends—word-of-mouth—for information to make the purchase decision. The Internet is a valuable source of information, but few consumers use it to buy a home or other big-ticket items such as a car.

• As with used-car buying, younger members value speed in financial transactions. This age group makes decisions on home purchases and financing quickly; almost half considered only one source for financing. Credit unions need a quick turnaround time on mortgage applications to be successful in this market. All stages of the mortgage journey should be geared up for speed to mesh with a generation that places a premium on a fast-paced lifestyle.

• Young consumers are not coming to the doors of credit unions for mortgages. And they are failing to join in sufficient numbers to ensure a healthy future for the movement. This is due, in part, to a lack of awareness of credit unions and their services, especially mortgages. Consumers—and many members—are simply unaware that the credit union offers mortgages.

• In an overcrowded field, banks and mortgage brokers are marketing their mortgage message aggressively and effectively; credit union marketing efforts often fall flat.

A significant number of respondents (49%) failed to comparison shop for financing.

• About 42% of the respondents bought their homes before moving into the community. Financial institutions that work with communication channels that young people use—realtors, friends and family and the Internet—are positioned for building awareness about their mortgage programs.

• A majority of respondents (80%) were highly satisfied with the home they purchased. They reported lower levels of satisfaction with the shopping experience for their first home, with an average of 69.4%.

• The respondents cited a lack

of information or confidence in information or knowledge about specific parts of the home buying and mortgage process. Credit unions are not perceived as influential in providing financing information. At the time of the first home purchase, consumers often have a lack of confidence in the amount of knowledge they receive about financing.


Home Buyers’ Age & ProfileThe average age of the first home purchaser was 26 years old, with the most commonly cited age as 25 years old, as shown in Figure A. Some 71% of the respondents made their first home purchases with a spouse or partner, and the partner’s age was an average of 27.6 years old.

The home buyers tended to be well educated; 76% have had training or degrees post–high school—69% of the partners had post–high school training. Household income averaged approximately $58,000. This is higher than the 2004 U.S. median household income of $44,389.6

Implications for credit unions Members in this age group are receptive to a home purchase for a number of reasons. First, and likely most important, they have adequate

Figure A

Age at time of home purchase

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incomes to fund the purchase and make mortgage payments. They are well educated and understand the financial advantages of home ownership.

They will be receptive to complex and detailed conversations about the benefits of membership and financing.

Home ownership is an entrée to the American Dream for many young consumers and the marketing images need to reflect this. Additionally, the images used to market home ownership should reflect the notion of the major life event as well as the financial advantages of home ownership. Since the target market is a well-educated group, the message should appeal to logic as well as emotions.


When & Why Did You Buy?The respondents purchased their first home during the years 1987 to 2005, but the most common time frame for the purchase was 2000.Respondents cited the following reasons (as Figure B indicates) for purchasing a home:• Were tired of renting, it was time to

buy and they wanted to own—34%*• Wanted to establish a household

with a spouse or partner—21%• Relocated to a new

community or town—9%• Cited interest rates dropping—7%,

and the birth of a child—6%

Implications for credit unions The reasons for buying a home become a familiar melody that lingers on for all age groups. Most of us can relate to the feeling of being “tired of renting,” since renting has a slew of drawbacks—unresponsive landlords, repairs that go unattended as well as a space that fails to meet one’s needs or desires.

Renting has limited financial advantages; many consumers view it as akin to throwing money down the drain.

The financial advantages of home ownership are considerable and should be trumpeted in marketing efforts. Home ownership is a wise investment; as mentioned in the introduction, over the past 30 years housing prices at the national level have grown at an annual average of 6%. And the tax deductions on interest payments and

real estate taxes are sizeable, while owners build up equity in their homes. This is an advantage that is unavailable in other countries—Great Britain and Canada lack this tax deduction.

The second most important reason cited is establishing a household with a spouse or partner.

The home is the foundation and center of family life for most of us. Buying a home is a momentous life event, especially for first-time home buyers. Along with a car, it is one of the first big-ticket purchases. Since buying a home is a purchase of profound importance, the credit union can serve as a trusted advisor.

Figure B

What was your reason for purchasing a home?

*Total of columns one and three

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Moving In or OutSome 12% of the respondents had lived all their lives in the community before buying their first home. They did not move to a different community. However, a substantial number, 42%, bought their first home before moving to the community.

Others moved to the community and waited up to a year to purchase (8.5%), with a further 7.5% waiting up to two years to purchase a home after moving to the community, as shown in Figure C. When asked about their knowledge of the community, there was a wide range of responses. Some 20% claimed to have low knowledge of the community before purchasing, 39% claimed medium knowledge and 41% claimed high knowledge before purchasing.

Those who claimed low knowledge obtained their knowledge from realtors, 32%; friends and neighbors, 15%; and the Internet; 10%. Those with more knowledge obtained it about half the time (49%) from having lived nearby or from family, friends and neighbors; 29%.

Implications for credit unions As we found in the previous study of first-time used car buyers,7 one of the factors cited for young people failing to join credit unions was a lack of awareness.

The findings of this study indicate that many young people will be unfamiliar with the community in which they are purchasing homes and, by extension, unaware of credit unions in the area.

To reach young members who are seeking their first home, it behooves credit unions to develop strategies that create awareness of the organization. The findings indicate that 42% of the respondents bought their home before moving into the community. Since these first-time home buyers are seeking knowledge and a general orientation about the community, a prudent strategy is to work with communication channels that young people use—realtors, friends, family and the Internet.

When young adults research a new community, they usually turn to the Internet for information. This is an opportunity to develop the credit

union’s Web site as a community resource or “community page” that lists restaurants, healthcare facilities, schools and shopping areas. If an effective community resource is available on the credit union’s Web site, new members will return to the site frequently for information needs beyond financial products and services.

The credit union Web site should have a professional appearance and be developed by skilled Web professionals who understand the use of key words that place the credit union first in Web searches of the community. This positions the credit union for new members and potential mortgages, but also engenders goodwill in the community. In a financial market where products and services have become commodities, a community page builds goodwill that places the organization above competitors.

Figure C

How long did you live in the community before buying your first home?

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Buying SatisfactionThe majority of respondents—80% on average—were satisfied or very satisfied with the home they purchased, as Figure D shows. They reported lower levels of satisfaction, though, with the shopping experience for their first home, with an average of 69.4%.

They were somewhat more satisfied with the overall experience of purchasing their first home, with 73% scoring either a 4 or a 5 on this measure. Satisfaction with interest rates, 78%, and financing methods, 81%, were similar, leaving room for improvement.

Implications for credit unions While respondents seemed satisfied with the home they purchased, there’s a need for improvement in the shopping, purchasing and financing phases of the home buying experience.

There are a number of ways to improve the buying experience. As mentioned previously, developing a Web site that becomes a community resource is one method. If you provide relevant information about the community, new members will come back to your Web site to seek financing options.

Community involvement is also an essential part of the mix. Consider Wal-Mart. Even though they have had well-chronicled battles over wages and predatory practices that drive out some local businesses, the world’s largest retailer focuses on community

involvement. They sponsor the annual breast cancer walk as well as safety issues with the local police force. They make an effort to be an integral part of the local community. Ronald McDonald House, another example, generates goodwill and community by providing lodging for families of cancer victims for another multinational corporation that has had its share of negative publicity.

Credit unions already have an advantage—they are perceived as part of the community and, in most cases, have a positive image. Building on this image by becoming more visible to the community will provide greater awareness of the credit union and its mortgage services.

Figure D

How satisfied were you with the first home you purchased?

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Seeking InformationThe respondents—women as well as men—reported that they were highly involved in the shopping, purchasing and financing of their first home, as Figures F and G show. Most said they felt confident that they could find the information they needed about purchasing and financing a home (86.4%). But, they perceived their knowledge of home purchasing at the time of their first purchase to be somewhat incomplete, as Figure H highlights.

Half of all respondents visited show homes, and 75% visited individual homes for sale. The average number of visits was to 5 show homes and 10 individual homes during a search.

Two-thirds of people were married at the time of the first home purchase. Of those who were married, 97% looked for a home together and 55% felt that the search process was shared equally in terms of influence.

We asked people which sources they went to for the information they used to make their purchase decision. A combined total of 45% relied on their real estate agent and on the Internet, and 37% relied on friends, family and colleagues, as shown in Figure E.

In purchasing a first home, two-thirds of the people purchased a preexisting home, one that had a previous occupant. One-fifth of respondents purchased a newly built home, and 12% contracted to build a new home.

Figure E

Where did you look for information to make your purchase decision?

Figure F

Involvement in shopping and purchase of first home

Figure G

Involvement in financing of first home

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Implications for credit unions One of the noteworthy findings of this study is the sources of information during the home buying process. Real estate agents and the Internet accounted for almost half of the sources, followed by friends, family and colleagues.

As the earlier study on first-time used car buyers indicated, the car dealer was the chief source for providing information in the buying process. This study indicates that the realtor is the information broker for home purchasing and financing.

The credit union’s relationship with the realtor becomes the ladle that stirs the home buying stew.

Developing and nurturing relationships with local real estate agents is vital. Educating and informing agents about the advantages of your credit union can be a catalyst for increased mortgage business.

The first-time used car buyers study revealed gender differences in the way men and women viewed the role of automobiles in their lives. There were no significant differences in home buying behavior in this study. Men and women tend to view the home buying experience similarly.

The previous study found that parental influence on used car buying was central to the purchase; this study found that for home buying, parental influence was irrelevant. Part of the reason may reside in the age difference—the average age of the respondents in the used car buyer study was 19 years old while the average age for this study was 26 years old. Parental influence for most adults tends to decline as children get older.

Respondents were highly involved in the financing of the home purchase. These members will be aware of the mortgage market and will expect a nuanced conversation about the advantages of a credit union mortgage: better

rates, lack of prepayment penalties, reasonable fees and, if required, equitable mortgage insurance.

Even though most of the respondents understood the complexities of financing, a minority felt their knowledge was incomplete. This is an opportunity to provide education and information about financing basics while the member is receptive.

Credit union staff should be able to explain the following concisely and in terms that are understandable: closing costs, loan qualifications, resale value, escrow, homeowner’s associations and fees and the differences between fixed- and adjustable-rate mortgages.

Even financially sophisticated members find the home buying and mortgage experience a complex undertaking.

Figure H

How would you rate your knowledge of home purchasing at the time of your first home purchase?

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Finding Realtors via Word of MouthTwo-thirds of the respondents used a real estate agent when looking for their first home. They found the realtor through a word-of-mouth recommendation or personal knowledge; they reported being satisfied or very satisfied with their realtor (79%), as shown in Figure I.

Realtors provided valued information. Aside from a spouse, the realtor was seen by 50% of respondents as most influential in the search for a home. A realtor provided information on financing 78% of the time and made a recommendation for financing 60% of the time. Realtors were also cited as providing information 65% of the time, and recommendations 46% of the time, on home insurance.

Implications for credit unionsWord of mouth continues to be the driving force behind choosing a professional—be it a real estate agent, an attorney or a dentist.

These findings echo the previous findings that the relationship with real estate agents and the credit union is critical to capturing mortgages for first-time home buyers. First-time home buyers turn to their realtor for help in searching for a home and for various types of home buying information.

Figure I

How satisfied were you with your realtor?

Maintaining a list of real estate agents who share values and goals of the organization adds value to the buying process. And the real estate agents will, in turn, likely recommend the credit union to clients for a mortgage if the process is effective.

This reciprocal arrangement is a common practice for many American businesses and organizations. Universities, for example, work with a select group of realtors who cater to new faculty hires and their spouses.

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Reflecting the North American cultural tendency for instant gratification, a majority of those surveyed (65%) had purchased their first home in less than 6 months, with the average search lasting between 3 and 4 months, as Figure J indicates. Young consumers place a premium on immediate decisions and financial institutions that save time. They want to make their purchases quickly; they also want the financing decided as soon as possible.

Implications for credit unionsResearch shows that consumers want three features in their financial transactions—speed, convenience and access. Speed is increasing in importance. Like the previous study on first-time used car purchases, young members want a quick response on loan applications as well as a timely loan approval and closing.

Speed of financial transactions is especially attractive to younger members. They are accustomed to communication channels that provide an immediate or rapid response—text messaging, e-mail, chat rooms and mobile phones.

When they make a decision to start looking for a home, they’ll start their search and conclude their purchase as quickly as possible.

Speed is the Answer

If they find the financial institution slow in any part of the financing process, they’ll go elsewhere.

FORUM Credit Union understands this expectation. The organization

advertises that it will provide an answer to a car loan application within 10 minutes, or the member receives a $10 check. This $980 million asset Indianapolis, Indiana credit union has yet to pay out the $10.8

Figure J

How long did you look for a home before purchasing?

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First Home FinancingRespondents paid an average of $121,368 for their first home. They were highly satisfied with the price they paid—4.31 on a 5-point scale. One-fifth of those surveyed lacked a down payment. The average down payment was $6,713, with a range from $500 to $80,000. Financial assistance for the down payment was provided 22% of the time, mainly from parents, other relatives or government grants.

Respondents financed 92% of the purchase price with an average amount of $109,134.

Most of the respondents (96%), made monthly mortgage payments. Some 82% of respondents had 30-year, fixed-rate mortgages, and 5.8% had 15-year terms. The average payment was $926.82, with an interest rate that averaged 6.42% on a fixed rate loan.

Respondents were less satisfied with the interest rate for their mortgage, averaging 3.89 on a 5-point scale, than they were with the price, the payments, 4.04, or the financing methods used, 4.04.

Most respondents (77%), reported that they started to think about how to finance their first home purchase before shopping for the home, or after some shopping (21%). However, 12% of the respondents didn’t think about financing until after the purchase decision had been made. In considering financing, about half of those surveyed considered only one source, 22% considered two sources and 18%

considered three sources. Only 12% considered four or more sources for financing their first home purchase.

Implications for credit unionsDespite increasing housing costs, the survey respondents were satisfied with the price they paid; there was little evidence of sticker shock among buyers. It is significant to note that fully one-fifth lacked the funds for a down payment, but had the means to support a monthly payment.

To reach this segment of buyers who have the means to afford a monthly payment but lack a down payment, credit unions could consider mortgages with low or no down payment requirements. Another option is to provide financing for the down payment.

Most respondents, about 78%, had 30-year, fixed-rate mortgages. In a rising rate environment, loans made during historic interest rate lows can quickly become a drag on asset-liability management by maintaining a loan portfolio with low loan rates while savings rates climb. The answer is to sell the 30-year mortgages on the secondary market. This can be a problem for some members, as some of the respondents objected to sending their mortgage payments to a new address and lender.

Respondents were thinking about the financing before purchasing a home, but one half of the respondents considered just one source for financing.

This finding indicates that many young people fail to comparison shop for financing. If your credit union fails to show up on their personal radar screens, they will not consider you as a lender.

Strategies to increase awareness of the advantages of a credit union mortgage can help reach young members.

A prime focus for consumers shopping for a car or a home is the monthly payment. Yet few financial institutions—credit unions included—provide information on monthly payments in their marketing efforts.

Listing the monthly payments on the interest rate on various mortgages would earn credit unions a competitive advantage. For many young adults, a 6% or 7% advertised mortgage rate is meaningless—they want to know how much the mortgage will cost them every month and if that rate fits into their monthly budget.

Figure K

Was your loan a fixed rate, adjustable rate or an

interest only loan?

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The most frequently cited source of information was a real estate agent, followed in decreasing order by family members or relatives, friends, Web sites and colleagues at work. About 2% of respondents applied online for a mortgage. The realtor also played a significant role in obtaining financing (38% scoring a 4 or a 5 on the scale) of the cases, as shown in Figure L.

Implications for credit unionsMany consumers consider financing options before they start shopping. They search for information from multiple sources. One of the most influential sources is a realtor. This aligns with previous findings about the importance consumers place in word of mouth. We tend to trust recommendations from people we know.

While family and friends are a big source of information and influence, they are not as easily identified as realtors.

Again, the need for credit unions to seek alliances with real estate agencies or individual realtors becomes evident.

Realtor as Information Broker

This is an opportunity to provide information to prospective home buyers, to become a trusted source of information and help.

The Internet continues to be a source of information, but not financing, as only 2% of the respondents applied online

for their mortgage. This finding parallels the first-time used car buyer study; only 1% of car buyers bought a car on the Internet. Other research continues to indicate that consumers choose to purchase certain financial services and products in person rather than online.

Figure L

What role did your realtor play in helping you obtain financing for your first home purchase?

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Seeking Mortgage InformationIn addition to looking for information, people inquired about mortgages most frequently at banks and savings & loans, mortgage brokers and credit unions, as Figure M shows.

When asked which source was most influential in providing information about financing, mortgage brokers were mentioned by 29.5% of respondents, with banks coming in second at 23.8% and credit unions a distant third at 12.3%.

Implications for credit unionsAccording to the survey, members inquire about mortgages at credit unions but fail to rank credit unions as influential in providing information.

Banks lead financial institutions in mortgage inquiries and in providing influential information. Face-to-face conversations still play a major role in many aspects of home buying. A financial institution’s Web site will be visited for the information on mortgages and financing that it provides, but most people will still come into the branch to make the application. This again points to the need for

engaging and educating the local community about the credit union and its mortgage services, and that credit union mortgages provide advantages that other financial institutions often lack. It is worth noting again that all

of those surveyed are credit union members. One would expect members to mention credit unions and to use their services more often than non-members; so in fact, the findings may be less favorable to credit unions than revealed in this sample.

Figure M

In the process of looking for financing, did you inquire about mortgages at the following?

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The respondents reflected the reality of the credit union market share in mortgage lending. When asked where they received their mortgage, their figure indicates that banks were cited by 37.6%, mortgage brokers by 35.5%, government agencies by 16.9%, and credit unions came in fourth place with only 8.7%.

Implications for credit unionsThese findings verify what financial services professionals know—credit unions are among the best-kept secrets when it comes to mortgages. Credit unions first received the authority to offer 30-year mortgages in the late 1970s. As late entrants to this market, they have remained small players.

Part of the reason is that many consumers—even members—are unaware that credit unions offer mortgages.

A compelling case can be made that credit union mortgages offer competitive advantages—lack of prepayment penalties, fewer fees and competitive rates. Building awareness in the local community about the credit union and services, especially mortgages, should be a strategy.

Banks & Mortgage Brokers Win the Prize

Figure N

Methods used for financing purchase price of home

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Quality of InformationRespondents felt fairly certain about the financing information they obtained, with only 14% expressing any uncertainty in areas like closing fees and taxes. However, about 36% ranked their knowledge as incomplete at the time of financing their first home, as evidenced in Figure O.

Implications for credit unions Since many of the respondents felt their knowledge was incomplete during the financing, this presents another opportunity for education and providing information. As the core of many credit unions’ missions is education, the period during the home buying and financing process can be used to help the member understand the complicated process of mortgages.

Many credit unions have found that seminars and formal educational programs are sparsely attended.

Members do not take advantage of educational opportunities except when they most need it—especially at the time of financing a home purchase.

Education and information can be provided as needed by the loan officer during the mortgage process. It can also be provided by first-time home buying seminars or self-paced instruction on the credit union’s Web site.

Figure O

How would you rate your knowledge of how to obtain financing at the time of your first home purchase?

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After making the purchase, 58% of those surveyed made improvements to their home. They made an average of seven improvements to their home. Asking about the most expensive improvement, we found that frequently mentioned improvements were: the roof; a bathroom; the kitchen; finishing a basement; replacing windows; new carpet; paint or flooring; landscaping; improving or adding a deck, porch or fence; or improvements to the garage.

These renovations ranged in price from $1,000 to $65,000, with an average of $55,302. Having just purchased a home, many of the respondents were eager to make improvements. Within six months, 38% had made improvements, and within one year that percentage rose to 57%. By the end of two years another 22% had made home improvements. They paid for these improvements

Home Improvement

largely through personal savings (75%), bank loans (14%), or credit union loans (6%), as Figure P shows.

Implications for credit unionsAn unexpected finding is that 75% of the respondents used personal savings for home improvements. Banks, credit cards and credit unions are also sources, albeit less often. There appears to be opportunities for

additional lending to existing mortgage holders, particularly since many of the home owners were using credit cards to finance the home improvement. Credit unions received only half as much of this business as banks.

Home equity loans have taken on a larger role for the American consumer. The housing market has continued to be robust, and homes are still appreciating in most U.S. markets. Home equity loans continue to provide consumers access to funds. This type of loan has been used to finance a variety of purchases, as well as home improvements. It would be in the credit union’s best interests to follow up the mortgage with home equity loan offers.

Another option is to offer more than 100% of the loan for home improvement purposes.

Many young adults have both the will and energy to devote “sweat equity” to make their first home meet their needs.

Young members may have a “starter house” that is in need of repairs, and the credit union can provide the loan. Special loan promotions can meet this need.

Figure P

What were the sources you used to pay for your home improvement?

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The Next BuyWe asked people how many years they had intended to keep their first home when they bought it. The average was 11.2 years. At the time of the survey, 72% of respondents still had their first home. For those who had sold, 28.2%, the average number of years they had kept their home was 4.42.

Reasons for selling the first home included: divorce, marriage, relocation, and needing a bigger house. While 20% could not remember one way or the other, 65% reported a gain on the sale of their home and 10% reported a loss. Of the 58 people who sold their first home, 48 had purchased a subsequent

home. Most of these people reported that they had purchased their new home due to outgrowing the first or relocating for employment. Only a third returned to the same source for financing the second home, however, the sample size is too small to make generalizations.

Implications for credit unionsAn average of 11.2 years is much longer than most consumers typically stay in their first homes. Life events—divorce, marriage, a new job—can affect how long one stays in one’s home.

A troubling finding: 20% of the respondents couldn’t remember if they had achieved a gain or loss on the sale of their home.

There could be numerous reasons for this. One that comes to mind is the varying degrees of financial literacy among American consumers. Credit union professionals may assume that all members understand the simple calculus of home appreciation. This is an erroneous assumption. Some of your members have low levels of financial literacy and may be unaware of the basics of mortgages.

The math of housing appreciation can be provided via the credit union’s Web site. This also affords members the opportunity to get the answer to a question that they may be too embarrassed to ask.


Home ImportanceWe asked respondents a series of questions about their opinions on home ownership and the risks involved. Factor analysis was then used to see how these questions relate to patterns of relationship among many dependent variables, with the goal of discovering something about the nature of the independent variables that affect them, even though those independent variables were not measured directly.

In this analysis, two factors stood out. There is an importance factor:people strongly agreed that a “house is an important part of my life,” and “choosing a house is an important decision for me.” The second, the uncertaintly factor, is related to the uncertainty and sense of risk felt when buying a home. People strongly agreed that it would be easy to “make a bad choice” and that homes are very dissimilar from one another and “things could go wrong.”

Figure Q presents the mean scores on a scale of 1—strongly disagree, to 5—strongly agree, for the eleven variables, and highlights the two component factors.

Implications for credit unionsRespondents felt strongly about the importance of owning a home. They were also aware of the risk of such a large purchase. Credit unions could use these themes in marketing communications to potential members—acknowledging both the importance and the risk felt.

Credit unions have a potential advantage over other financial institutions in that they may be perceived as providing the best service and function as trusted advisors. In this role as trusted adviser, they can help members make the appropriate choice for housing and financing.

Figure Q

Using a scale where 1 is “strongly disagree” and 5 is “strongly agree”, how much do you agree or

disagree with the following statements:

Components

Mean Score1

Importance Factor2

Uncertainty Factor3

A house is an important part of my life. 4.60 .844 .051

A house is very important to me. 4.74 .835 .059

Choosing a house is an important decision for me. 4.80 .626 .094

The type of house I own matters to me a lot. 4.49 .583 .073

For me, a house does not matter. 1.41 -.472 .467

When buying a house, it is hard to make a bad choice.

1.99 .076 .642

Houses are all very similar. 1.70 .062 .611

Nothing can go wrong with a house. 1.38 .071 .554

I choose my house very carefully. 4.65 .115 .037

I often pay attention to real estate and home advertising.

3.45 .171 -.140

A bad buy on a house can cause grief. 4.68 .295 .234

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.1. Mean Score: the higher the number, the stronger the agreement; the lower the number, the stronger the disagreement. 2. Importance Factor: the higher the score, the tighter the link/connection/correlation of the statement to this factor.3. Uncertainty Factor: the higher the score, the tighter the link/connection/correlation of the statement to this factor.


Home ownership is intertwined with the American psyche, culture and economy. Mortgage lending and home equity loans have driven the expansion of the economy for the past several years. Credit unions are viewing mortgages with a sense of necessity—return on assets has been steadily declining since 2002 to hover under 1%, and membership growth is slowing and graying at the same time. Gaining new members—especially young adults—via their mortgages is essential for credit unions to remain healthy and relevant in the 21st century.

As the earlier study on first-time used car buyers indicated, the car dealer was the chief source for providing information.

Concluding Thoughts

1 “2006 Auto Lending Report: Successful Strategies for a Competitive Market,” Callahan & Associates, Inc., January 2006. 2 Interview with Dave Colby, chief economist CUNA Mutual Group, May 25, 2006.3 “Housing and Mortgage Markets: An Analysis,” Mortgage Bankers Association, September 6, 2005.4 U.S. Census Bureau, August 30, 2005.5 The organizations surveyed include: First South Credit Union, Bartlett, Tennessee; GECU, El Paso, Texas; Great Wisconsin Credit

Union, Madison, Wisconsin; Truliant Credit Union, Winston-Salem, North Carolina; and Andrews Credit Union, Suitland, Maryland.6 U.S. Census Bureau, August 30, 2005.7 “First-time Used Car Buyers,” Filene Research Institute, June 2006.8 Interview with Doug True, SVP Lending & Technology, FORUM Credit Union, May 25, 2006.

Endnotes

This study indicates that the realtor is the information broker and plays a pivotal role in all aspects of the buying experience, including locating, purchasing and financing a home.

Educating and informing real estate agents about the advantages of credit union mortgages can be a catalyst for an increased market share.

Young members value speed in their financial transactions. This age group makes decisions on home purchases and financing quickly. They use communication channels that provide instant or rapid responses. Financial institutions that work with these channels are positioned for building awareness about their mortgage programs. Credit unions need a quick turnaround time to be successful in the mortgage market.

Young consumers are failing to join credit unions in the numbers needed to ensure a healthy future for the movement. This is due, in part, to a lack

of awareness about credit unions and their services and products—especially mortgages. This survey also indicates low levels of information and consumer confidence in the knowledge about aspects of the home buying and financing process. Since the credit union’s core mission is self-help and education, providing relevant education during the home buying process can serve as a significant advantage.

COOLSpecial Report

S O L U T I O N S

A G u i d e f o r C r e d i t U n i o n s

They’re as big as the boomers.

They like fi nancial services

Custom-fi t, Online, and

Outrageous. And, oh yeah,

they’re fi ercely Loyal!

Filene Research Institute

P.O. Box 2998, 5910 Mineral Point Road

Madison, Wisconsin 53701-2998

608.231.8550

www.fi lene.org

1752-123(09/06) ISBN 1-932795-04-9 © FILENE RESEARCH INSTITUTE

FIRST-TIME HOME “Y’ers”

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