High Home Prices, Mortgage Rates Worry Young Buyers

Younger generations may be holding on to the American dream of homeownership, but they face big challenges in today’s challenging market.

A recent survey by brokerage RE/MAX shows that nearly two-thirds of prospective Gen Z and millennial homebuyers in the U.S. are primed and eager to own a home. Sixty-five percent say they feel knowledgeable about the real estate market, and more than half are confident about their financial preparedness. However, that desire to buy and settle down is tempered by concerns about the lack of affordability.

“Homeownership is still an important milestone,” Amy Lessinger, president of RE/MAX LLC, said in a news release. “While current market conditions have impacted timelines, this generation of homebuyers is resolute in their desire to achieve [it].”

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Affordability issues imperil homebuyers' plans

High mortgage rates and home prices, both due to inflation and a lack of enough inventory to meet demand, are among the major obstacles hindering Gen Z and millennial buyers (folks born between 1981 and 2012). But other concerns include additional costs that impact housing affordability, like closing costs and down payments.

Mortgage rates have been averaging close to 7% for most of the year, increasing the cost of home financing and making it harder for would-be borrowers to qualify.

Higher rates have resulted in a typical monthly mortgage payment of about $2,900 on a $442,000 loan, the median home sales price last month. If the home price is higher, that payment easily surpasses $3,000.

Unfortunately for many buyers, home prices keep climbing, although at a slower pace than a year ago, and just how much an “affordable” home costs depends on its location. According to a report from listing site Zillow, the price of a typical starter home is $196,611 nationwide. However, a starter home costs at least $1 million in more than 200 cities around the country and requires a much larger financial commitment.

Other factors prospective Gen Z and millennial buyers need to consider when calculating affordability include the down payment and closing costs.

According to data from the National Association of Realtors, first-time buyers make an average down payment of 8% of a home’s purchase price. Closing costs range between 2% and 6%. In a city where the starter home costs $1 million, that means a down payment of $80,000 and up to $60,000 in closing costs.

The combination of these factors has already led to a record number of canceled sales contracts for the month of June, so it’s no wonder they are also a concern for prospective buyers.

Most common worries for Gen Z and millennial buyers

There are other factors that younger buyers view as roadblocks to homeownership under the current market conditions, according to the RE/MAX survey. These include factors before and after the home purchase. (Numbers don’t add up to 100 because respondents were allowed to select more than one answer.)