Generation Z faces a tough road to homeownership amid soaring prices and rates

Generation Z, the cohort of young adults born between 1997 and 2012, has grown up in a world of economic uncertainty, social unrest, and environmental challenges. They have also witnessed the struggles of their older peers, the millennials, who faced the Great Recession, student debt, and delayed milestones. Now, as Generation Z enters adulthood, they are facing another major obstacle: the housing market.

According to a recent survey by Rocket Mortgage®, 71.5% of Gen Zers plan to buy their first home in the next 1-6 years, while 37.2% plan on buying as soon as 1 – 3 years. However, their homeownership dreams may be hard to achieve in the current market conditions, where inventory is scarce, prices are high, and rates are rising.

The median national home price was just over $405,000 as of August 2023, according to the National Association of Realtors (NAR), up from roughly $310,000 three years ago. The interest rate on a 30-year fixed-rate mortgage averaged 7.8 percent, compared to 3.38 percent in 2020, according to Bankrate data. These factors make it more difficult and expensive for Gen Zers to afford a home, especially as they earn entry-level salaries and deal with inflation.

One of the biggest challenges for Gen Zers is saving for a down payment and closing costs. Forty percent of non-homeowners in Bankrate’s Financial Security Survey reported an inability to save for these expenses. Even with just 3 percent down at the current median price, a Gen Z borrower would need to save more than $12,000, plus additional costs for moving and repairs. However, many Gen Zers are under the misconception that they need to put 20% down to qualify for a mortgage, which could discourage them from applying.

Another challenge for Gen Zers is qualifying for a mortgage based on their income, credit, and debt. Many Gen Zers are still building their credit history and score, which can affect their eligibility and interest rate. They may also have student loans or other debts that can lower their debt-to-income (DTI) ratio, which measures how much of their income goes toward paying debts. Lenders typically prefer a DTI of 36% or lower, but some Gen Zers may not be aware of this requirement or how to improve it.

Despite these challenges, Generation Z is not giving up on homeownership. They are motivated by various reasons, such as starting or growing a family, having more space, saving money on rent, and achieving the American Dream. They are also taking steps to prepare for buying a home, such as researching the market, improving their finances, and seeking professional advice.

Generation Z is determined to overcome the barriers to homeownership and make their mark on the housing market. However, they may need to adjust their expectations, timelines, and strategies to succeed in the current environment. They may also need to explore alternative options, such as low-down-payment programs, first-time buyer assistance, co-buying, or renting-to-own. With the right preparation, education, and support, Generation Z can turn their homeownership nightmare into a dream come true.

PREs1 and TiK4TaT Research team, 2024