April 14, 2024
The perennial underdogs of home buying are indicating they’re up for the challenge, even if it requires giving something up.

By Sarah Foster, Bankrate

Buying a home in an era where borrowing costs are high, inventory is low and housing prices are expensive isn’t a goal for the faint of heart.

But the perennial underdogs of home buying — the younger Americans who’ve consistently struggled — are indicating they’re up for the challenge, even if it requires giving something up.

The majority of Generation Z and millennials who do not own a home say they’re willing to make a sacrifice to find more affordable housing (at 82% for those between the ages of 18 and 42), according to Bankrate’s housing affordability survey published in April. That compares with 61% of non-homeowner Generation Xers and baby boomers (those between the ages of 43 and 77). They’re also more inclined to take action than Americans overall, including homeowners and non-homeowners alike (64%).

To become homeowners, those younger generations say they’d be willing to do anything from buy a fixer-upper (29%) or move out of state (29%), to take on roommates and live with additional family members (27%), downsize their living space (27%) or move farther away from family and friends (26%).

Their motives are clear. Gen Z and millennials who don’t own a home still appear to have aspirations of purchasing one: about two-thirds (or 66%) of them consider owning one a feature of the “American Dream.” Meanwhile, just 6% of Gen Z and 8% of millennials say they never want to own a home, compared to 19% of Gen X and 17% of baby boomers. It’s long been known, however, that the U.S. economy has had other plans for them.

Experts say the stakes may be even bigger. Young Americans’ housing decisions could reshape the economies of where they decide to live and work, as well as the housing market overall. Millennials have been the largest generation in the U.S. since 2020, and Gen Z’s dominance is already coming into play.

If Americans find themselves continually priced out of buying a home, housing affordability factors could keep underpinning higher rent prices — a factor that may also keep the Fed on edge to raise interest rates even more this year. The longer those potential homebuyers stay on the sidelines, the more difficult their path to wealth-building becomes.

“Housing used to be thought of as the path to creating the middle class,” says Nela Richardson, chief economist at ADP. “If housing is becoming exclusive, what supports the middle class in terms of wealth creation? That’s still an open question.”

The housing conundrum: Higher rates aren’t weighing on home prices — yet

Any increase in mortgage rates can sting would-be homebuyers, but the pain is especially acute after living through the low-rate era that preceded the recent inflation surge.

As the Fed rushed to raise interest rates at the fastest speed since the 1980s, mortgage rates more than doubled in just 10 months, hitting a two-decade high of 7.12% by October 2022. The speed was unprecedented.

It came at a time when millennials — and even adult Gen Zers — were just starting to join the housing race. Millennials made up the biggest share of buyers between 2014 and 2022, according to data from the National Association of Realtors. Their gains, however, quickly lost pace: Baby boomers are now the largest generation of homebuyers, at 39% and up from 29% last year, the latest NAR data now shows.

Part of the story, Gen X and baby boomers aren’t on the same starting line as millennials and Gen Zers. They’re more likely to already be homeowners, meaning the massive run-up in home prices comes to their advantage. Just about a quarter (or 26%) of all buyers purchased for the first time in 2022, the lowest in NAR’s records and down from 34% in the prior year. The typical first-time homebuyer also hit 36 years old — the oldest on record.

Yet, higher mortgage rates were supposed to be the pain before the gain. Housing demand is typically either helped by low rates — or depressed by more expensive ones. Early in the Fed’s rate-hiking campaign, Fed Chair Jerome Powell expressed hopes of an eventual housing “reset” at a post-meeting press conference in June 2022 in response to questions from Bankrate.

To be sure, sales have softened across the country. They’re down about 20% in May from the prior year, the latest NAR data shows. But home prices have only cooled a modest 2.4% from their peak in June 2022, according to national data from the Case-Shiller Home Price Index.

But real estate is local, as First American Financial Corporation’s Odeta Kushi puts it. Some markets haven’t even seen a decline in home prices at all, including Miami, Orlando, Tampa and Charlotte, according to the title insurance company’s Real Home Price Index and its analysis of “boom, no-bust” cities.

Surge in mortgage rates exacerbates housing shortage

Keeping prices high are ongoing inventory challenges, and higher rates have only exacerbated them. After the subprime mortgage meltdown of 2007-2009, new-home construction slowed rapidly and never fully recovered. By the time the coronavirus pandemic-induced recession hit in February 2020, housing starts were still down 31% from the 2007 peak, Census Bureau data shows. Starts for single-family units remained even more depressed.

Balanced housing markets tend to have at least six months’ worth of housing supply, but as of May, it would’ve taken just 3 months to sell all of the homes on the market, NAR data shows. Buyers are picking up the pace — that ratio is up from a low of 2.6 months in February — but the process of constructing to selling a home takes time.

“You used to be able to find a home around $250,000, and there’s just limited inventory in that price point now,” says Erica Davis, a broker at Guild Mortgage, of her home base in Myrtle Beach, South Carolina. “You’ve got values going up; interest rates are going up. It’s a lot more on their monthly payment. I have a lot of pre-approved clients, and there’s nothing that they can qualify for.”

Younger generations who don’t currently own a home reported in Bankrate’s poll that not having enough income is a major barrier to homeownership (45% for Gen Z and 44% for millennials), as well as home prices being too high (34% for Gen Z and 42% for millennials) and being unable to afford a down payment and closing costs (30% for Gen Z and 43% for millennials).

Structural changes are keeping sellers on the sidelines, too. Homeowners who locked in sub-3% mortgage rates during the lows of 2021 are in no rush to sell their homes if it means committing to a near-7% mortgage for a new home. Older Americans are also living longer, and technological and health advancements are allowing them to stay put in their homes.

“New supply — that’s the best way to solve the housing affordability issue over the long run,” Kushi says. “That lack of inventory puts a floor on how low prices can go.”

A millennial herself, Kushi knows these stats are more than just numbers. Just last year, she was a first-time homebuyer. She recalls being in a bidding war with one home that had 19 offers. She almost didn’t even end up closing on the home she bought.

She’d paid a visit to the potential property 10 hours after it was first posted and scheduled an inspection for the following day. Two hours after her showing, however, the home had already received an above-market offer.

“They were kind enough to take a look at an offer from me,” she says. Kushi ended up winning by $1,000. “I always tell people, do not get caught up in the hysteria. Make a budget, and stick with it.”

Should younger Americans make a sacrifice to buy a home, or should they wait it out? Here’s 8 steps you can take in a tough housing market

The young Americans who want to own a home are facing a major — and expensive — dilemma. Should they keep renting, should they wait out the market or should they make a sacrifice just to buy? No choice is free or painless.

Delaying homeownership can come with major setbacks. Homeowners’ median net worth ($254,900) is more than 40 times the net worth of renters ($6,270), according to the Federal Reserve’s most recent Survey of Consumer Finances from 2019.

But so can buying a house that you’ll later regret. Younger Americans who own a home are also more likely to wind up facing a financial-related regret about their purchase, at 45% for Gen Zers and 36% for millennials, versus 26% of Gen X and 22% of baby boomers. Those include anything from locking in a too-high monthly mortgage payment or rate, as well as facing unexpectedly expensive maintenance fees or other hidden costs.

Other common non-financial-related regrets include buying too small of a house or not liking the location, Bankrate’s poll found.

The longer Americans wait to mull it over, the more it’s costing them, too. National rent prices are slowing down from the previous two years of gains, but many cities are still just stabilizing after pandemic-era price bursts, according to data from Zumper. Historically pricey cities like New York and Jersey City are still facing record highs, and no end is in sight, the housing listing site said.

The choice is always a challenge when buying a home is a commitment. For a year and a half, Matthew Hackett’s family had to make do in a smaller, older home as they searched for a bigger house in their price range. The New York-based operations manager at mortgage lender EquityNow said he slept in the living room with his wife while his two children each took their home’s only bedrooms until 2014, when they found their current home.

They didn’t want to move to New Jersey or Long Island, even if it meant finding more homes in their price range. Instead, they endured the trials and tribulations of the hunt to wait for a place in their target location and price range.

They ended up finding a place. It had four-inch carpets, four layers of curtains, pink and floral wallpaper and more signs of its age — but “those are the sacrifices you make,” Hackett says.

“There are always going to be sacrifices, unless you have some unlimited supply of wealth,” he adds. “You have to figure out what you’re willing to sacrifice.”

For the young Americans who want to buy a home but aren’t sure if they should make more sacrifices or stick it out, here’s 8 tips for you to decide what to do.

1. Think about what’s most important to you over the long haul

Don’t set unrealistic expectations for yourself: Buying a perfect home that checks all of your boxes is next-to-impossible, and having a too-narrow search could also cause you to pass up on perfectly suitable housing options. The ultimate goal, however, is making sure you’re not sacrificing the features that are most important to you.

You may be open to living anywhere, or perhaps you’d prefer to be close to family, friends or a city. To know what you have to work with, though, you have to first know what works for you.

And don’t just think about the now. Financial situations change, and families grow. With Americans staying put in their homes for longer, you’ll likely want to consider what will be important to you over a longer time horizon.

2. Know your budget and stick with it

You’ll never know what works for you if you don’t have an idea of how much house you can afford in the first place. Financial experts often recommend never spending more than 25-28% of your monthly take-home pay on housing as a typical rule of thumb.

Look at your household’s spending habits, savings, debts and income. Other costs to include are closing and moving costs, property taxes, insurance and utility costs, as well as maintenance fees and emergency repairs.

Beware, however, of constructing a budget that’s so strict you can’t take vacations, live comfortably, continue saving and treat yourself every now and then. Jake Northrup, CFP and founder of Experience Your Wealth, recommends looking at housing at the low, medium and high end of your budget, then figuring out what you may need to sacrifice to achieve any of those price points.

“You may decide that buying a home on the lower end of your budget and having the ability to travel twice per year instead of once per year is more important to you than having a home on the high end of your budget,” Northrup says. “Without understanding these tradeoffs, you are making one of the biggest financial decisions of your life in the dark.”

3. Consider why you want to become a homeowner

For most Americans, their home is the biggest purchase they’ll ever make. The bonus is that their valued asset will hopefully keep appreciating. But it’s important to be honest with yourself about the cyclical nature of housing.

“The decision to buy a home — if you’re not an investor — is a lifestyle decision,” Kushi says. “Housing is, first and foremost, shelter.”

Housing prices will rise and fall depending on the local and national economy. Cities may be more affordable in the Midwest, for example, but they might not appreciate as much as coastal cities or growing markets such as Austin and Phoenix.

Those gyrations don’t matter so much if you’re willing to wait out the bumps and stay put for longer. But if the main reason why you want to buy a home is so you’re banking the money rather than your landlord, the lifestyle isn’t as glamorous as it often sounds. Remember: Anytime a dishwasher breaks or the bathroom plumbing needs fixing, you’re on the hook to pay for it.

Northrup recommends asking yourself some main lifestyle questions, including:

What is it about owning a home that you cannot achieve through renting?
How is owning a home directly in line with your core values?
What’s the opportunity cost of putting your money towards a home?

“If you feel buying a home is still the right thing to do after answering these questions, then you are likely ready to consider buying a home,” he says. “However, if you feel that buying a home jeopardizes some of your other goals such as traveling, paying down student loans or investing in yourself, you may want to reconsider whether buying a home is the right thing for you.”

4. Factor in the costs and requirements of relocating for housing

If you’re moving far away, your home won’t be the only major purchase you have to make. Relocation fees can also be expensive, and it’s also important to research tax and insurance-related costs of your new area, too.

Above all, you want to be sure your new home is the right place for you. It might not be worth the money, time and energy to move all of your assets long-distance if you plan to go back to your original location in only a few years — especially if housing affordability challenges eventually subside.

“Just because it’s cheaper doesn’t mean that that’s the place where you ought to be,” says Kaysi Gordon, CFP and founder of New York-based Kaysi Gordon Financial Planning. “If the only thing you’re looking at is, ‘The pricing of housing is cheaper there. I’m going to go there and be miserable,’ I’d say that’s a bad bet.”

5. Think twice about moving away for a job — or relocating because you can work remotely

Despite structural shifts in the way Americans view work, they’re still indicating a willingness to move to a new area for a job. Even more surprising, young Americans are especially inclined.

More than 1 in 4 American workers (or 26%) said in a March Bankrate poll that they’re likely to relocate for a job at some point over the next 12 months. Those figures jumped for younger Americans, hitting 37% for Gen Z workers and 34% of millennial workers, compared with 17 and 8% of their Gen X and baby boomer counterparts, respectively.

Remote work, meanwhile, may inspire workers to move to any area that’s cheaper since they have the flexibility.

Workers, however, should carefully research the area where they’re considering moving. The job market is solid today, but it might not be forever. Unemployment is projected to hit 4.5% by July 2024, according to Bankrate’s second-quarter Economic Indicator survey. Know what opportunities your new location may give you if you were to lose your position — and have a game plan in mind.

Some industries could face worsening employment outlooks than others, but a slowdown in remote-work jobs has long been predicted. The share of positions advertising remote or hybrid work has fallen over the past year, from a peak of 10.3% in February 2022 to 8.4% in May 2023, Indeed data shows. Job postings have also fallen the most in the sectors that are considered remote-work friendly, including IT, software and other information technology services. At the same time, Indeed finds that job-seeker interest in remote work is still near an all-time high.

A softening labor market shifts the power away from employees and back to employers, giving companies the wherewithal to take away those benefits.

6. If you’re interested in moving to a lower-cost city, consider these Bankrate-backed metro areas

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If your career is easily transferable and you’re flexible about where you live, Americans can utilize Bankrate’s rankings of the country’s cheapest cities, its best places for first-time homebuyershidden housing gems and best cities to launch a career for help in their housing research.

7. Get a handle on your finances while you wait

Americans shouldn’t attempt to time any market, let alone housing or real estate. The best time to buy a house doesn’t come down to mortgage rates or home prices — but rather, your individual financial situation.

Your credit score, a strong history of on-time payments and low debt-to-income ratios can help keep you first in line for lenders’ most competitive offers. If you’re caught in housing limbo, consider using the time to your advantage, padding up all of the components of your future mortgage application.

You can also use the time to prioritize saving up for a down payment, as well as closing, maintenance and emergency costs. If you’re successful, you may even be able to increase your housing budget.

And remember: A minimum 20% down payment is a widespread misconception. You might still have to pay for private mortgage insurance (PMI) if you put down less, but it also might make more sense for your individual financial picture.

Most conventional mortgages allow you to put down at least 3%. Some lenders may even have special deals for first-time homebuyers, such as down-payment match programs, lower rates and more.

“Good savings habits, an aversion to overspending and debt and investing in your earning power are the building blocks of successful homeownership,” says Greg McBride, CFA, Bankrate chief financial analyst. “A few years of modest, even tepid, home price appreciation will allow the incomes of young, upwardly mobile aspiring homeowners to catch up to home prices.”

8. Know you don’t have to buy a home to grow your wealth

Above all, it’s important to remember that you don’t have to wait to become a homeowner to grow your wealth. The strong financial habits of saving for the unexpected and investing for longer-term goals often are what pay off the most.

If you already have an emergency fund and are contributing to your retirement accounts, Americans can also invest for their future outside of an employer-sponsored plan by opening their own brokerage accounts. You could even pay for a downpayment with some of the money from your investments, depending on your time horizon.

If you were to start investing just $200 a month starting at 22, you could have $1.2 million by the time you reach 70, assuming an 8% annual return, calculations from Bankrate show.

“It’s not a bad thing to not want to be a homeowner,” Gordon says. “It just might not be your value system. It’s more important to live in your value system than to say, ‘This is the American Dream.”

Methodology

Bankrate commissioned YouGov Plc to conduct the survey. All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,545 US adults (18+), among whom 1,338 were homeowners and 1,207 were not homeowners. Fieldwork was undertaken March 22 – March 24, 2023. The survey was carried out online and meets rigorous quality standards. It employed a non-probability-based sample using both quotas upfront during collection and then a weighting scheme on the back end designed and proven to provide nationally representative results.Bankrate.com commissioned YouGov Plc to conduct the survey. All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2,417 adults, among whom 1,524 were either employed or looking for work. Fieldwork was undertaken on March 8-10, 2023. The survey was carried out online and meets rigorous quality standards. It employed a nonprobability-based sample using both quotas upfront during collection and then a weighting scheme on the back end designed and proven to provide nationally representative results.

Visit Bankrate online at bankrate.com.

©2023 Bankrate.com. Distributed by Tribune Content Agency, LLC.

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