Gen Z (“Zoomers”) are people who were born between 1997 and 2012. A Rocket Mortgage survey says 86% of this generation in the United States is mentally ready to buy homes. Nearly half hope to make their purchases within five years.
They’d likely benefit from becoming homeowners. But can they afford it?
Many Young Adults Want to Buy, But Can’t Pull It Off.
In their grandparents’ day, middle-class twenty-somethings bought starter homes. More than two-thirds of the adult population could afford a home in 1960. But today, it’s much harder to save for a down payment. Just 43% of our population can afford to buy homes.
In early 2022, Bankrate commissioned YouGov to take a poll. Responding were 2,529 adults. Of those, 1,132 didn’t own their homes. Most pointed to money as the main reason for not buying.
A general rule, according to NextAdvisor, is that homes are priced about 5X a household’s annual income. In 2022, though, the average house will be 8X the household income.
No wonder it’s so hard for first-timers to get into the market.
Plus, the younger generations tend to be weakened by student debt and high rents. They might be letting their credit card debt build up. Their high credit utilization ratios could be putting a mortgage loan approval out of reach.
Why Is the Average U.S. Home So Expensive?
We’ve not fully recovered from the last housing recession — the doozy we had in 2007-2009. At that time, home construction was put on hold, so the housing supply dropped sharply. But the U.S. population kept rising, and people kept needing homes. In the face of low supply, the prices shot up.
The pandemic had a weird effect on home prices, especially when it led to bottlenecks in building supplies. Today’s home prices in many areas are about a third higher since the pandemic began. Astonishingly, homes have a median listing price of $425K, according to recent statistics from Realtor.com.
Needless to say, wages are not keeping up with costs. The typical household mortgage payment now hovers around 29% of income.
Building companies do expect to roll out a lot more housing in 2023. Analysts say that will help real estate get back on track by about 2024. For two prominent examples:
- Moody’s Analytics expects home values to backslide about 10% by mid-2024 — and even more in the markets that have soared the highest.
- Realtor.com® has also forecast a gradual property value drop in 2024, particularly in places where a lot of building is going on.
All of this bodes well for buyers. We did see mortgage rates go up in 2022, but reports at the moment show the spike in interest rates flattening out. So far, so good.
So, will the market get back to normal? Hardly. In fact, lenders are nervous about less-established buyers, thinking there is a good chance of a U.S. recession in 2023 (Europe’s already in one). Lenders get concerned if home values start to stall, or if borrowers could end up in financial troubles. With strict rules now governing loans, buying won’t get much easier for younger people.
So here we are. With the inflation rate we have today, it’ll continue to be tricky to buy a home.
☛Can buying a home help the buyer get ahead in inflationary times? The short answer is yes — and a homeowner gets to claim mortgage interest deductions on federal taxes, too.
For Now, What Workarounds Can Help Gen Z Home Buyers?
Gen Z buyers might wonder if they can get a home without putting 20% down. For those with modest savings accounts, getting a house or condo with just 3% to 3.5% down is possible.
☛Just 3% down? Yes, it’s possible. Here’s how it’s done.
But as long as the amount paid down on the home is below 20%, a borrower must pay private mortgage insurance, or PMI. Accepting the private mortgage insurance requirement is one way to get financing as a beginner. If the borrower is approved for an FHA loan, and then faithfully pays the debt down while the home’s value rises, the owner can refinance later to get out of the PMI. If it’s a conventional loan, the lender can agree to release the borrower from having to pay PMI — without refinancing.
PMI raises a homeowner’s monthly payment burden. Those who can save to put 20% down can keep their burden lighter. In other words, savings really matter.
What other ideas can help young adults buy their own homes? Many (three-fourths) of the Bankrate survey respondents said they’d buy a fixer-upper, or move out of their states, to become homeowners. Some are remote workers who are OK with starting their careers away from major employment hubs.
Another big idea is house hacking. For example, a person or couple might buy a duplex. Then they can live in one part of the building and rent out the other part.
You might have heard that mortgages for multi-unit residences mean different rates, insurance costs, and underwriting rules. Fannie Mae requires a 680 credit score for a multi-unit property buyer — in contrast to 620 and above for someone buying a regular, single-unit home. But buyers who actually live in their investment properties can get better terms. This means the duplex house hacker could apply for a low-down payment FHA or VA loan. They could alternatively apply for a conventional loan product, like Freddie Mac’s Home Possible®.
A different kind of “hack” is buying with a friend, as tenants in common. This is a way for co-owners to take title if one or both of them couldn’t have done it alone. “TIC” co-owners don’t necessarily have to own the property in equal shares.
If you’re struggling, at least you should know you are not alone. Inflation isn’t making saving easy for anyone right now. Combining resources is necessary for many older buyers, too.
First-Timers Can Get the Most Out of Real Estate Agent’s Know-How
Most Gen-Z buyers are first-timers. The better their real estate literacy, the better they can understand why the market is the way it is, and the best possible ways to navigate it. Each person’s situation is unique, though. A well-regarded pro in a local real estate agency is worth seeking out. A good agent listens carefully, offers crucial information and support, and smoothes out the path to closing day.
As daunting as this economy might be, whenever we check in on the rising cost of renting, we wouldn’t call this a bad time to buy. Heading into 2023, homeownership is possible for Generation Z, as long as these hopeful buyers can manage to save or pool their resources.
Not everybody starts out with the same circumstances, though. For many young people, this is all easier said than done.
Supporting References
Aidan Seidman for NextAdvisor / Time: Homeownership May Seem Out of Reach for Generation Z. How You Can Prepare Now (Aug. 5, 2022).
Tom Huddleston Jr. for CNBC / NBC Universal: Millennials and Gen Zers Do Want to Buy Homes — They Just Can’t Afford it, Even as Adults (Jun. 12, 2022).
And as linked.
Photo credits: RODNAE Productions and Ivan Samkov, via Pexels.