October 18, 2023

Home affordability turns increasingly generational

Homeownership is often considered the cornerstone of the American dream. Homebuying has long been considered a natural step for young professionals and couples who are looking to build wealth and stability.

However, the dream seems to be slipping out of reach for significant portions of younger homebuyers, including those in the prime homebuying years between ages 30 and 40.

Born between 1981 and 1996, the Millennial Generation has often been labeled the "unluckiest generation.” In addition to carrying the weight of rising student loan debt and exploding childcare costs, their adult lives have featured a Great Recession, a pandemic and now, historic inflation.

Millennials keyed the pandemic housing surge, propelled by remote work opportunities and favorable mortgage rates. But inflation and the subsequent rising interest rates created a buying conundrum.

Millions who didn't buy - and their counterparts from younger Generation Z - are still seeking their way into the housing market, but consistently high home prices undermine their buying power.

While folks in traditional prime homebuying years are struggling, baby boomers, those born between 1950 and 1964, are keeping the market afloat.

Due to accumulated equity, homeowners aged 58 to 71 can move up, refinance, or downsize with little regard for interest rates. Boomers now make up 39% of home buyers - the most of any generation. Historically it has been homebuyers in their 30s and 40s leading the way.

Boomers tend to have more money, too. According to the National Association of Realtors (NAR), an income of about $95,000 per year is needed to qualify for a 30-year mortgage with a 20% down payment.

Median home prices have surged 26% since early 2020, reaching $416,100 in the second quarter of 2023. Adding to the dilemma, average 30-year fixed-rate mortgages are more than double those from during the pandemic.

The uncertainty surrounding future mortgage rates adds an extra layer of complexity. The game of homebuying now includes a “cat and mouse” element where buyers try to wait for just the right interest rate before putting in a bid to purchase a home.

That works out for some buyers, but most real estate professionals say it’s prudent to accept the reality of high rates and plan accordingly. Rates go up and down and potential buyers may miss golden opportunities waiting for mortgage rates to drop to a certain level.

Though 30-year fixed mortgages averaged below 5% from the Great Recession until the pandemic, long periods with very low rates are not historically typical.

As the market continues to evolve, the decision to enter the realm of homeownership may become not just a financial calculation, but more of a reflection of broader economic realities and personal aspirations.