Houses are expensive — and Generation Z will soon discover homebuying is not what it used to be.
Those born between 1997 and 2012 are dubbed Generation Z or “Zoomers”– and 86% of them want to buy a home with 45% wanting to do it in the next five years, according to a survey conducted by Rocket Mortgage. I also happen to be one of them — an aspiring Gen Z homeowner — and homeownership for us feels unattainable. Millennials think they have it tough, but Gen Z will face the largest average income to housing price ratio in 70 years. Historically, the average home costs about five times the yearly household income, with 2022 data showing the average house costing more than eight times the yearly household income.
In order to meet the demands of a seemingly vicious housing market, the Gen Z homebuyer has had to adapt and evolve. Don’t fret: There is no shortage of tools and strategies you can use. It all comes down to decisions. Understanding how to build credit, navigate the market, and understand your values will lead towards achieving any financial goal, buying a house or otherwise.
“What you do right now is really gonna define where you start,” says Chris Rager, mortgage sales manager for AmeriSave, a nationally accredited mortgage lender. “If you start ahead, it’s much easier to stay ahead.”
Homeownership for Gen Z’ers doesn’t have to be a fairy tale. Here’s how to make it a reality starting now.
Step 1: Build Your Credit
The first thing on your to-do list is to start building creditworthiness now. The better your credit profile, the better the loan terms and rates you can get. Maintaining your overall credit profile is the most important factor in being ready to buy a home, Rager says. “A lot of people don’t realize it’s not just paying your bills on time, but also how you manage your actual debts, things like how high you let your credit card balances go,” says Rager.
Concepts like credit utilization ratio, debt to income ratio, and employment history are vital in ensuring that your borrower profile is strong. These concepts can be confusing. That’s why Rager says “having an early start on having a great financial life setup is important.”
This is especially true for college students who will likely encounter debt for the first time in the form of student loans. These same students are likely opening their first lines of credit through credit cards, and fail to save. Rager warns against “falling into that trap where you get behind with credit card debt, or you’re not paying your student loans when they come due.”
“If you start off badly, then you’re in a hole and now you have to dig out of that hole,” he says.
Avoiding early financial pitfalls on top of thinking about how to finance a purchase as large as a house can be overwhelming, but there are many misconceptions that contribute to that impression. While it certainly helps, you do not have to have perfect credit and a large surplus of cash. Rager says that “as little as 3% to 3.5% can get you into a home.” In addition, Rager says that “there are state programs that can help you get a down payment,” in addition to other first-time homebuyer assistance programs. However, it is worth noting that having 20% saved for a down payment can save lots of money in the long run.
Anytime your down payment dips below 20%, “it generally means that the borrower is going to have to pay private mortgage insurance, or PMI,” says Clare Losey, an economist at the Texas Real Estate Research Center at Texas A&M University. PMI is an additional fee added to the mortgage payment every month until the borrower hits a certain level of equity. It can usually be removed when you reach 20% of the home’s purchase value. Starting out with no PMI is a huge plus.
Step 2: Learn Housing Market Fundamentals
If there is any beauty to be discovered in the homebuying process, it won’t be found in its simplicity. That’s where the experts come in.
With the right approach, finding a great home is within your reach, says Carrie Rabinowitz, a Charlotte, North Carolina, real estate agent.
“If you’re a first-time homebuyer, you really don’t know what to expect and you don’t know how to be prepared to buy a home,” Rabinowitz says. A good real estate agent will be able to guide the buyer through a complicated process and fill in any gaps in their understanding, as “some buyers don’t realize how competitive and confusing it is until they’re in the process.”
“At the moment it is a seller’s market, meaning sellers have the advantage,” says Rabinowitz. In a seller’s market, sellers have the leverage to completely disregard an offer “if it isn’t accompanied by a preapproval letter.” A preapproval letter is a certification that a buyer can afford a house in a given price range that must come from a reputable lender. To get a preapproval letter, get in contact with a lending agency. Together, you will get an appraisal on the home you want to buy to certify its value, certify the title with the previous owner, then have the house inspected for damage. Getting this certification should be the first step you take in buying a house.
The seller’s market has “been fueled by historically low rates that really drove homebuying,” Rager says. “Combined with the remote work environment, people were looking to move up, get a better house.”
Today’s housing market is still feeling the effects of the Great Recession from 2008. “In the wake of the Great Recession, residential construction essentially halted, and we haven’t … recovered the new housing units that we would’ve needed to have added in order to keep pace with household formation,” Losey says. This has left the supply of homes far below the demand, driving prices and competition higher.
Current market conditions are not likely to remain unfriendly to young buyers for much longer. The historically low mortgage rates and high demand for housing are unique circumstances due to a variety of factors, such as policy decisions and unique economic conditions during the COVID pandemic, Rager says. As rates rise, it becomes more expensive to borrow, lessening intense competition. “Normalizing is going to make the market more friendly for a buyer,” he says. As the strange economy of the past few years begins to unwind, the housing market has a chance to become more normal.
Step 3: Decide What Matters to You
Although house prices and interest rates may have stymied the hopes of some buyers, there are still many ways to find a house to meet any set of needs.
”People are having to make compromises in all segments of the market,” Rabinowitz says. Due to the high level of competition, buyers are having to think hard about what they value in their home. “Only three things contribute to the sale of a home: condition, location, and price,” she says.
The good news is, the condition of a house can be changed. Buying a cheaper house and using the leftover funds to renovate it can be an appealing option. When done well, you can completely transform the home. For those who wouldn’t shy away from a project, a ‘fixer upper’ can be an opportunity to truly personalize a new home without necessarily compromising on price or location.
Unlike a home’s condition, the location of a house typically cannot change. However, with the growth of remote work, a home’s location may not be as important as it once was. Homes closer to the center of a city tend to be smaller and more expensive than homes in the suburbs or even rural areas. Instead of compromising on these things, a larger house farther from the city center can present an enticing option. For a generation whose lifestyle may not be predicated on proximity to an office building, the opportunity to have a bigger yard, newer home, and a cheaper price tag could be very attractive to the new generation of home buyers. As young Gen Z’ers begin their career, you will have more homebuying options if you focus on job paths that can offer remote work opportunities.
A home’s price tag is often the first thing potential buyers think about, and understandably so. By nature, a home’s price is a function of condition and location. Coming to terms with what you value in a home is the first and most important step in finding one within a realistic budget that also meets your needs. Losey says “trying to find creative ways to save money is going to be very important for these households moving forward,” so that you have as much flexibility as possible when choosing a price range. “Inflation is going to be a major headwind for our youngest households, because it’s just going to make it that much more difficult to save,” she adds, making an early start to saving even more crucial to being able to afford your desired price range. Start by researching the city in question to gain an understanding of what lifestyle can be expected while living there. Reading about your dream city on the internet or getting in contact with a local real estate agent are both great first steps.
A “perfect home” is one that you feel confident buying and fits your needs and your budget. Sometimes the best finds are in the places you’d never look.
Let’s Make This Happen
Owning a home is an admirable and achievable goal that anybody can set their sights on. Creating a plan to save money, build credit, and learn about personal finance are excellent steps to take.
Not everybody starts out with the same circumstances, and as with most things worth doing, there will be challenges. However, there are always choices to be made that can move you along the path to homeownership, or whatever financial goals you have.
Knowing that you don’t know everything can be humbling, but it’s also an opportunity to grow. Not everybody knows how to use a credit card responsibly. It’s not necessarily obvious that a poorly timed car purchase, switching jobs, or even making large, unexpected deposits could hurt your chances of owning a home. These are things that are learned.
Ultimately, the housing market is not something to fear. The real challenges will be found in creating a healthy financial profile. For Gen Z, both a common and avoidable roadblock on the path to owning a home could be a lack of financial preparation. Educating yourself on personal finance and building good money habits will be the key to owning your first home.
Good financial habits take time to develop, but with commitment and curiosity, it’s a path that anybody can take.