Story at a glance
- Despite housing market challenges, most adults view homeownership as a hallmark of the American Dream.
- But the main barrier for younger generations is affordability, which has been made worse by soaring inflation.
- The market is especially challenging for the first-time homebuyer, whose initial issue is often coming up with the capital for a down payment.
Homeownership remains a key benchmark for younger Americans, yet many encounter numerous hurdles immediately upon entering the market.
Some need help from their parents to meet basic down payments to qualify for a mortgage, while all enter right into a housing market where inventory is historically low.
First time homebuyers deal with these issues while facing rising inflation, growing interest rates and a supply crunch that leaves them wading through an ultra-competitive market in search of housing suitably priced for first-time owners.
Despite the drastic changes in the housing market and the strains of inflation, recent polling shows most American adults view homebuying as a hallmark of the American dream. Around 65 percent of Millennials and 59 percent of those belonging to Gen Z put homeownership as a fundamental marker of success.
But their main barrier is affordability, whether due to their own incomes or the cost of a home.
The market is especially challenging for the first-time homebuyer, whose initial issue is often coming up with the capital for a down payment, Robert Dietz, chief economist for the National Association of Home Builders (NAHB) told Changing America.
“First, they have to consider what their abilities are to accumulate a down payment – through their own savings, if they lack access to what is often called the ‘bank of mom and dad,’” Dietz said. “Those are key challenges to be even able to essentially qualify for a mortgage and be able to purchase a home.”
Polling from May shows that 79 percent of homebuyers between the ages of 18 and 29 had help from their parents when purchasing their first home. One in 10 homeowners across all age groups said their parents purchased the property for them outright.
“Then there’s the question — and it varies somewhat by geography — but the question of whether you can find available inventory, whether that’s new or an existing home, particularly single-family entry level type construction, so a smaller home that’s appropriate for a younger homebuyer,” Dietz said.
Dietz noted that although some estimates suggest the U.S. is short several million homes, NAHB puts the number closer to 1 million.
Median home prices in June jumped 11.2 percent from the previous year at more than $428,000, while the median time a home sat on the market jumped to 18 days.
There has also been a growing disparity between median household income and the average cost of a home over a six-decade period through 2020. The average cost of a home in 1960 was $11,900 with the median household income sitting at $5,600, according to Census Bureau data.
“Construction costs for homebuilding have increased roughly 19 percent. Lumber was kind of a key canary in the coal mine when it came to gauging whether we were going to see a bout of inflation,” Dietz said. “Lumber pricing really took off in late 2020. It was a signal that we were going to see these higher consumer costs including higher rents and higher home prices.”
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Low inventory has also intensified the competition, as first-time homebuyers were coming of age as the market was changing due to a combination of housing preferences and the onset of widespread remote work, Joel Kan, the Mortgage Bankers Association’s Associate vice president of economic and industry forecasting, told Changing America.
Moreover, the gap between earnings and housing costs has only been exacerbated by growing inflation, which can cut into what one might put toward a mortgage down payment.
Mortgage rates are also an issue with average rates rising to around 5.51 percent from 3.3 percent at the beginning of the year. This creates “an extremely challenging affordability situation for a lot of first-time homebuyers,” according to Kan.
“We’re at a time where affordability was already under strain, but now with inflation having taken over a lot of the challenges, we’re paying more for food and for fuel. That’s eating away at someone’s potential savings on a down payment — and especially for a first-time homebuyer who doesn’t have the sale of an existing home to lean on, to put in for the next purchase,” Kan said.
While the yearslong hot housing market has strained young buyers, they might still prepare by taking a few steps, according to Kan. First young buyers should find a targeted type of home within an appropriate price range while preparing to absorb higher interest rates. Then one should consider getting their finances in order, including speaking with multiple lenders to determine the right mortgage.
“And so, getting your documentation in order, working with the lender and making sure that you’re comfortable with them helping you close the deal is important,” Kan said. “But, you know, it’s certainly still as challenging.”
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