Why Homeownership Feels Out of Reach for Today's Young Adults (& What Can We Do About It?)
Annabelle Blankemeyer
Treasury Sales Associate at JP Morgan Chase | CFP Candidate | Finance & Economics Writer
"The real reason Gen Zs and Millennials can't buy a house is because they..."
I'm sure you've heard these assumptions (& tons more) before. The reality is, the statistics say otherwise. The younger generations do want to move out, they are working hard, and sacrificing a morning latte isn't going to make the difference between purchasing a home or staying with friends/family.
So if we can't blame these excuses for young Americans' inability to purchase a home, what exactly is the culprit?
The answer is threefold: mortgage rates, home prices, and the relatively small change in average income. Let's break each of these down.
Mortgage Rates
A staggering 81% of Americans under 50 years old are worried about current mortgage rates (Edelman Financial Engines, 2024). When rates dipped below 3%—a historic low—during the pandemic, people went wild trying to purchase homes. This became people's frame of reference, so compared to mortgage rates during the pandemic, today's 6% rate looks incredibly high.
The reality is, historical data shows us that a 6% rate is pretty normal! Rates have been around 6% for the past ~50 years, with a mean of 7.80% (Bankrate, 2024).
So if mortgage rates aren't materially different from what they have been in the past, why is it so difficult to afford a mortgage payment?
A higher mortgage rate impacts your monthly payment more significantly if the price of the home is extremely high. The mortgage payment for a $400,000 home would be ~$2,400 per month with a 6% rate, but just ~$1,700 per month with a 3% rate—and that's not including additional costs like home insurance and property taxes. When home prices are higher, mortgage rates have a massive impact on housing affordability.
It's no wonder Gen Z and Millennial buyers are hesitant to purchase homes at this rate. Unfortunately, many of them just can't afford the monthly payments on these expensive houses!
Home Prices
Home prices shot up during the pandemic due to many factors, such as an increase in demand for homes, historically low mortgage rates, and decreased consumer spending. We know from economic theory that when consumer demand increases, prices increase too.
To make matters worse, nation-wide quarantines meant everyone was staying at home pretty much 24/7. That didn't exactly encourage people to sell their homes...
With fewer homes on the market, we ran into a second major issue: the supply of homes reached record lows.
This created the perfect storm, because:
In the past, housing prices have risen somewhat steadily. However, with the leap in prices during the pandemic, household income just can't catch up. Adding inflation into the mix exacerbates the issue even further.
Household Income
The Case-Shiller Housing Price Index, a measure of national home prices, increased almost 38% from January 2020 to January 2023 (S&P Global, 2024). In contrast, Median Household Income increased just 18.5% in the same span of time.
With home prices outpacing household income, the dream of owning a home grows further and further out of reach. What's more, the 2023 median household income of $80,610 doesn't stretch as far as it used to.
Prices for food, gas, utilities, and other basic essentials have skyrocketed, making each dollar's spending power worth a little bit less. A basket of groceries today is much more expensive than it used to be.
August's NAR Housing Affordability Index revealed that the average monthly mortgage payment (principal and interest) was $2,152, and the median price of an existing single-family home was $422,100. This is a drastic difference from 2021, when the average monthly payment was $1,206, and the median price was $357,100.
"Kids these days just need to pull themselves up by their bootstraps, work harder, cut costs, and save their money. Then they'll be able to afford a home!"
No.
This difference in affordability isn't solved by hard work, saving up, and cutting costs. This is a much larger macroeconomic issue that makes it markedly more challenging to buy a home today. Maybe these charts will help better elaborate upon my point:
Here you can clearly see why many young adults feel like buying a home is impossible. With prices 5x, 8x, or 10x annual income, home ownership can be very out of reach.
So what can we do about this?
Just because home ownership is more difficult nowadays doesn't mean it's impossible. There are several things young adults can do to put home ownership in reach.
1. Figure out how much you can pay monthly
A good rule of thumb is to make sure your mortgage payment is 28% or less of your monthly gross income (income before taxes). This isn't a requirement, just a guideline.
If you make $75,000 per year, your monthly gross income is $6,250. 28% of $6,250 is $1,750, so you should aim to keep your monthly payment around there. If you have lower costs in other areas (i.e., no car payment, no student loans, etc.), you may be able to afford more.
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2. Decide how much house you can afford
Once you know how much you can afford to pay monthly, you can decide what price range works for you. We'll continue with the example from before. An annual salary of $75,000 at today's mortgage rates can buy a house priced at about $230,000.
If you'd like to try some different numbers and customize this to suit your situation, try this Home Affordability calculator: How Much House Can I Afford Calculator | Bankrate
3. Make a plan to save up a down payment
You may have heard along the way that you need to save 20% of the home's price for a down payment.
Throw this bit of information away. With home prices as high as they are, this is wildly unrealistic.
Most first-time homeowners will put between 6% and 7% down (Investopedia, 2024). Make this your goal. It's more attainable and more realistic.
Keep in mind that the 20% recommendation is to avoid paying Mortgage Insurance - something you'll need to pay for if you put down less than 20%. However, this will fall off when you own 20% equity in your home, so you won't have to pay this forever.
Once you have a goal down payment, decide when you want to purchase a home. Do you want to buy a home some time in the next 5 years? Or are you trying to buy a home in 6 months? Your expected timeline will dictate how much you need to save each month.
4. Shop around and negotiate your rate
Remember earlier when we went over just how much your mortgage rate can impact your payments? When you get there, it can be helpful to apply for preapproval with several different lenders. Mortgage rates are generally around the same, but it's always helpful to shop around.
If you plan to stay in your home for a long time (at least 5, but ideally 10+ years), it may be advantageous to use discount points to lower your rate. This is when you pay an additional amount at the start of the loan to "buy down" the rate. If you plan on keeping this mortgage for a long time, you can save a lot of money over the life of the loan.
5. Ask the seller to pay closing costs
Closing costs are fees/expenses associated with the administrative and legal side of purchasing a home. These can be quite expensive, and unlike a down payment, paying closing costs won't add to your equity stake in your home.
Asking the seller to pay your portion of the closing costs is a great way to make purchasing a home more affordable. Your real estate agent can help you make this request, and many sellers are happy to do so.
I hope you learned something new while reading my article today. If you did, please leave a like or comment in support. I greatly appreciate it!
You can find more free, educational content on my website, ALBfinance.com. I post articles on a variety of Personal Finance and Economics concepts. All posts are written to be free of stress, judgement, or jargon.
See below for the research used in the creation of this article:
References
S&P Corelogic Case-Shiller Index All-Time Highs Continue in July 2024 - Index Announcements | S&P Dow Jones Indices (spglobal.com)
Disclaimer: Nothing in this post constitutes financial advice. I post representing only myself and ALB Finance, not my employer.
#Homeownership #Millennials #GenZ #HousingAffordability #RealEstateTrends #HousingMarket #MortgageRates #PersonalFinance #FinancialLiteracy #FirstTimeHomebuyers #EconomicTrends #WealthBuilding #HousingCrisis #AffordableHousing #ALBFinance
Devoted Husband, Father, Friend, and Agent
4 个月Great article Annabelle. Thank you for writing it! One of the biggest problems I see with our current culture is that most young people don't like the options on the market that are selling for $230,000. In many areas what you could pay for a nice starter home 4 years ago will only get you a fixer upper today. So, now more than ever, it is important to budget either the additional mortgage payment you'll pay for a nice home at a higher purchase price (if you can qualify for it), or plan accordingly for the expense of contractors you'll need to hire to get the home in a state you want to live in. Alternatively, become a DIYer and fix it up yourself. That is the option we took and I am a far more confident in my ability to care for our home because of it. At the end of the day, it is incredibly true that "Where your treasure is, there your heart will be also" (Jesus of Nazareth, 33 A.D). Whether your treasure is time or cashflow, young adults who want homes have to be prepared to sacrifice more than ever with today's market.
Lighting Designer and Technician, Artistic Administrator, Professional theatre-maker.
4 个月Thank you for giving young people such a valuable resource! This helps clarify and explain so many questions I didn’t even know I had.
Graduate Student in Rhetoric & Composition | Teaching Assistant | Writing for National Award Initiative (WNAI) Tutor
4 个月Thank you for debunking many misconceptions— particularly with the down payment many believe they have to obtain before getting a home! As long as you have a steady income, home ownership is very possible for many young adults :)
Graduate Student in Psychology and Clinical Counseling
4 个月The article is wonderfully written and very informative. Thank you for posting!