The Future Is Now: Home Buying for Millennials and Gen Z
As time moves forward, so does the median age to buy a home. Right now, the median age for homebuyers is 47. In the past decade, the median age to buy a home has increased a full 8 years. Why is that? Why are Millennials and Generation Z waiting so long to buy a home? The team at Streamline Realty wants to break down some of the factors behind why younger generations are waiting to buy homes. We also want to look at some data that might indicate this trend is turning around.
Younger Generations Have High Standards
There are several factors behind younger generations waiting to buy a home, but social pressure isn’t one of them. Both Millennials and Generation Z spend hours dreaming up their perfect home features and interior decorating. This is why they fuel a good majority of the hours logged in Pinterest. Younger generations want to buy homes, but, historically, they have been waiting longer than previous generations.
Millennials and Generation Z have high standards when it comes to buying a home. All that time daydreaming has led 45% of millennials to expect the first home they buy to be their “dream home”! Younger generations are simply willing to wait longer to buy a home than previous generations because they want the perfect house. Their unwillingness to compromise does have some benefits. Waiting longer gives them the opportunity to save more for a larger down payment. However, these perfectionist tendencies can be a little more taxing on realtors than previous generations. They are pickier about the listings they want to tour, the features that they want to see in their first home, and demand a more personalized home buying experience. Either way, Millennials and Generation Z know what they want and are willing to wait for it.
The upside of waiting a little longer to buy a home, young buyers become more established in their careers prior to making such a large purchase. Lawrence Yun, NAR’s Chief Economist, recently commented.
In some areas of the country, high competition in the starter home market forces young buyers to wait longer. The extra money they save during that time opens their search to bigger, more expensive homes. If this trend continues, older Millennials will skip the starter home altogether, going straight to a trade-up or premium home instead. If you do that what do you miss out… benefits of cashing out on equity and moving into a bigger property…
Younger Generations Fear They Cannot Afford to Buy a Home
The biggest reason why younger generations wait to buy a home is that they fear they cannot afford to buy a home. Many of the younger generation carry a substantial amount of debt. For many of them, that debt was accrued through college loans. This is a big psychological barrier for these groups. In fact, 94% of Millennials say that their number one goal in life is to be debt-free. While the idea of more debt is understandable, owing money on a mortgage is not the same as credit card debt. The big reason for this is that even before you pay off your mortgage, a loan on a house gives you a huge asset. Remember, as you pay off your loan, the difference between the value of your home and the remainder on your mortgage is equity. Equity is an asset that can help you build financial wealth.
Beyond being afraid of more debt, Millennials and Generation Z are afraid that they do not have enough in the bank to buy a home. However, it is not so certain that these fears are well founded. There are a lot of reasons why you need less than think you think to buy a home or qualify for a mortgage.
The truth is that there are several different mortgage programs that are perfect for Millennials and Generation Z. The first set of programs that is perfect for younger generations are VA loans. Admittedly, these mortgages are only for members of the armed services, so not everyone can get them. However, if you do qualify, they offer zero down payment loans and take less than perfect credit.
There are other programs with low or zero down payment options for more than just a VA lender. FHA loans were designed for younger generations. FHA loans are for first time homebuyers require a downpayment between 3.5% and 10%. Cities, counties and states have their own first-time homebuyer programs in addition to the federal government program. This makes it likely that Millennial and Generation Z applicants will find a program that works for them. Many still think that even a 3.5% down payment is a bridge too far. However, there are many programs available that can help.
For Instance, Massachusetts offers the MassHousing Down Payment Assistance Program (DPA). To qualify for the DPA you must be a first-time homebuyer earning 100 percent of the area median income or less. They also take into account your income, credit score, and debt-to-income ratio. The program provides up to 5% down payment assistance or up to $15,000, whichever is less, for single-family homes, condominiums, and two-, three-, or four-family properties. The minimum down payment for an FHA loan is 3.5%, so if you pay your cards right, you could get into a home with little to nothing. However does that benefit you throughout the lifetime of your loan?
The DPA program is not a home-buying grant. MassHousing's down payment assistance is a 15-year, fixed-rate 2% interest rate loan. The note becomes due if the property is sold or refinanced before the end of the 15-year term. This percentage would be rolled into and calculated as part of your monthly mortgage.
Some Massachusetts counties and cities have programs that are attached to or similar to the MassHousing, like the one offered by Brockton. The advantage of the assistance program offered with Brockton is that income eligible first-time homebuyers will be considered for a 0% interest-deferred payment loan. This loan is for equal to 3.5% of the purchase price (up to $12,000) through the BRA secured by a Mortgage and Promissory note. In addition, NHS may provide additional funds up to 25% of the amount provided by the City (up to $3,000).
A homebuyer could cover their entire 5%t down payment ($15,000) on a property purchased for $300,000. Under the $300,000 purchase price example, the homebuyer could buy a home with no money down. A 5% down payment on a home purchased for $425,000 is $21,250. With the $15,000 down payment assistance, the homebuyer would only need $6,250 for the remainder of the down payment on a $425,000 purchase.
However, even with all of these great tips on how to avoid purchasing a home with a large lump sum of your savings, borrowers will still need money to pay for closing costs. Right? That’s not quite true either. A homebuyer could structure their offer so that they receive a credit at closing from the home seller to cover some or all of the costs at closing. For example, with the help of a dedicated buyer agent, a homebuyer that wanted to pay $420,000 for a home could offer $427,000 for the property. They could then get a $7,000 buyer credit at closing for authorized closing costs, prepaid items, and settlement charges. The $7,000 would be financed through the borrower's home loan and could be used to offset the amount of money a homebuyer would need to bring to the closing for closing costs. If closing costs were $8,100, for example, the purchaser would only need $1,100 to cover closing costs.
Final Thoughts
For every reason that Millennials and Generation Z might think buying a home isn’t in the cards, there are reasons to think it is. To be fair, it seems as if many people in the younger generations are catching on. During the 2020 real estate boom Millennials made up one of the largest groups buying homes. It turns out that the historically low mortgage rates were enough of an incentive for Millennials to overcome their own objections and buy houses. As mortgage rates stay low, look for more members of the younger generations to follow suit.
If you are one of the many young renters planning on buying your first home soon, contact us to help determine what type of home will best suit your present and future needs. Many are concerned that the dream of owning a home is currently beyond their grasp. However, there are many programs available that make your dream closer to being a reality than you realize.
