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Wednesday, February 21, 2024
Feb. 21, 2024

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Millennials and mortgages: navigating the path to homeownership in a changing market

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Millennials are the largest generation in the U.S., and everyone has been expecting members of this massive demographic cohort to reshape the housing market. So far, however, it hasn’t quite happened.

Not that millennials don’t value homeownership — two-thirds of them say it’s a central part of the American dream, according to Bankrate’s 2023 Financial Security survey. Still, it’s been a struggle for many aspiring millennial homebuyers to become homeowners.

These mid-twenty-to-early fortysomethings face a tough market. Home prices remain near record levels, and mortgage rates are much higher than they were two years ago. Low inventory, high inflation, expensive financing: The combination has created an affordability squeeze that’s forcing many millennials to keep renting.

Here’s a profile of this generation, their challenges when it comes to home buying, and their behavior when they do become homeowners.

Millennials and home buying statistics

  • According to the National Association of Realtors (NAR), 70% of younger millennials and 46% of older millennials are first-time home buyers. First-timers make up 26% of all homebuyers, in general.
  • Millennials trailed baby boomers as the largest generation of home buyers in 2022: They now make up 28% of buyers, vs. 39% for the boomers.
  • When buying a home, over half of millennials pay either the full asking price or up to 10% more, according to NAR.
  • Personal affordability issues keep 78 percent of aspiring-homeowner millennials from purchasing a home, while current housing market/economic conditions hold back 59 percent of them, according to Bankrate’s April 2023 Financial Security Poll.
  • 66 percent of millennials cite owning a home as a key element of the American dream — compared to 84 percent of baby boomers (aged 59-77) and 76 percent of Gen X-ers (aged 43-58).
  • Among those millennials who have become homeowners, 44 percent say they’ve no regrets about the purchase.
  • The best metro areas for first-time homebuyers in 2023 are Austin, Texas; Kansas City, Missouri; Raleigh, North Carolina; Minneapolis and Jacksonville.

Millennials in a changing housing market

Millennials are typically defined as those born between the early 1980s and the mid-1990s. Their entry into the real estate market has looked different from that of older generations. Generally, millennials are buying their first homes later than their baby-boomer parents. There are a number of reasons behind that delay, but high student debt loads and the lingering effects of career stagnation caused by the Great Recession are some of the most commonly cited.

Even so, for the last eight years, millennials had represented the biggest share of buyers in the National Association of Realtors’ (NAR) “Home Buyers and Sellers Generational Trends Report,” mounting as high as 43% of buyers in NAR’s 2022 report. However, the share declined in the latest 2023 survey. Despite millennials’ large numbers and their being the prime age for home acquisitions, baby boomers are now the most active generation of homebuyers in the U.S.

Blame it on the triple whammy of pandemic-elevated home prices, tight inventory and rising mortgage rates. The lack of ready cash or assets to draw on hasn’t helped either. Among millennial non-homeowners surveyed by Bankrate earlier this year, many cited paltry savings as their reason for continuing to rent.

Saving enough money, in particular, continues to prove challenging. In Bankrate’s survey, over half (53%) of the older millennials who aspired to homeownership pointed to being unable to afford the down payment and closing costs more than any other reason or any other age group. Younger millennials blamed an array of affordability hurdles: not having enough income (49%), home prices being too high (47%) and not being able to manage the down payment and closing costs (42%).

In addition to being held back by financial considerations, many millennials are in a general pattern of reaching life milestones later. The average age for getting married has been rising, for example. In 2020, the median age for a man’s first marriage was above 30 for the first time in history, according to Census estimates, while the median age of a first-time bride was above 28, also for the first time. Subsequently, millennials are starting their families later. And they’re waiting to buy homes. NAR research indicates the typical first-time homebuyer was 36 years old in 2022 — up from 33 the previous year. That was an all-time high.

Sacrifices millennials will be willing to make for affordable housing

No spoiled brats, they: Millennials are willing to make compromises in the name of finding a residence they can afford. Among the sacrifices they cited in Bankrate’s April survey:

  • Buy a fixer upper: 33%
  • Move out of state: 32%
  • Downsize their living space: 31%
  • Take on roommates: 27%
  • Move farther away from family and friends: 30%

Millennials and home renovations

Since the pandemic, remodeling has been all the rage among American homeowners. Given their tight budgets and low rates of homeownership, millennials haven’t fully jumped into that game yet. They made up just 9% of homeowners who renovated in 2022, according to the “2023 US Home & Houzz Study” by home remodeling platform Houzz.

Still, millennials’ median spend on renovations has increased by 33% compared with 2021 and doubled since 2020. It’s now at $20,000, the study found.

Social media has played a role in the trend. FOMO no longer is just for nights out and vacations, it seems, but also for home renovations and remodels. Not to say that social media is a negative force — to the contrary, it’s a place for younger homeowners to find ideas, learn how to do projects and share before-and-after photos.

Houzz found that millennials did more home system upgrades than other generations, with automation and security enhancements being their top priorities. And reflecting work-from-home trends, home office upgrades also were more popular among millennials than among members of any older generation in 2022.

To pay for renovations, most millennials (88%) use cash from savings. However, 35% also use credit cards, and they’re more likely to use them than older generations do. Only 15% of millennials used a secured home loan, perhaps reflecting they had not yet built up much of an ownership stake to borrow against.

Tips for millennial homebuyers

If you’re looking to become a homeowner, there are a few key bits of advice to keep in mind:

Work with a real estate agent.

Although the housing market is showing signs of cooling, now’s not the time to embark on a purchase without someone to guide you through the process. If you’re a first-time homebuyer, it’s even more important to have a real estate professional who understands your needs, concerns and stresses.

Use technology

When baby boomers were first-time buyers, home listings were kept by real estate agents in paper binders. Today, it’s all available on your phone, tablet or laptop. Real estate apps and home technology tools help homebuyers peruse their local real estate market’s listings, take virtual tours, find a Realtor, sign contracts and even shop for mortgages.

Real estate agents and brokers have embraced the changes — many share new listings across platforms such as Instagram and Facebook. They’re going there because that’s where the buyers are — 76% of homebuyers used a mobile device in their home search, the National Association of Realtors says. Millennials used them twice as often as the silent generation.

Shop around with multiple mortgage lenders to make sure you’re getting the best deal

It’s not just about interest rates, but the all-in costs and other terms and conditions on your loan. Online sources abound that allow you to follow interest rates (like Bankrate’s mortgage page) and compare lenders’ offerings and terms.

Make a budget and stick to it

You don’t want to wind up with more houses than you can afford. Keep that budget going once you move, too. In Bankrate’s April survey, the top regret for millennial homebuyers was maintenance and hidden costs being more expensive than expected (expressed by 42% of those with buyer’s remorse). In a subsequent June survey, 5% of millennials said that buying more home than they could afford was their biggest financial regret. While this percentage is relatively low, millennials were above average in this instance: just 3% of all respondents felt that way.

Over half of millennials (54%) feel behind in their emergency savings, according to a Bankrate September study. You’ll want to be ready to cover the ongoing expenses, plus whatever issues inevitably crop up.That cash cushion can bail you out when it’s time to pay for emergency home repairs.

Be strategic in financing home renovations

Using credit cards to pay for home improvements is a risky move, considering their double-digit interest rates: The average interest rate on credit cards as of late October was just nearly 21%, according to Bankrate’s national survey of lenders. In contrast, the average rate on a home equity line of credit (HELOC) or home equity loan was around 9%. The interest could be tax-deductible as well, if you itemize on your return.

FAQ

  • What years are millennials?

Millennials are those born from 1981 to 1996, according to the Pew Research Center. They’re preceded by Generation X and followed by Generation Z.

  • When should I start the homebuying process?

Building the foundation for homeownership starts years before you actually start shopping for a specific home. Boosting your credit score and saving for a down payment are long-term projects. But once you’re ready, the timeline really depends on how eager you are to do a deal. In today’s low-inventory market, finding a place can take a while. You’ll probably want to get preapproved for a mortgage before you start house-hunting, as that status assures buyers you can get financing. Actually shopping for a home, qualifying for a mortgage, and then getting to the closing table usually takes a few months all told.

  • What is the average age of a first-time home buyer?

As Americans delay milestones such as marriage and having kids, the typical age of a first-time buyer has risen to 36, according to the National Association of Realtors.

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