Home ownership may seem out of reach for Generation Z

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Homes are expensive – and Generation Z will soon discover that home buying isn’t what it used to be.

Those born between 1997 and 2012 are called Generation Z or “Zoomers” — and 86% of them want to buy a home with 45% wanting to do so in the next five years, according to a survey by Rocket Mortgage. I’m also one of them – an aspiring generation Z homeowner – who feels home ownership for us is unattainable. Millennials think they’re having a hard time, but Generation Z will experience the largest median income to housing price ratio in 70 years. Historically, the average cost of a home is about five times the annual income of a family, with data for 2022 showing that the average cost of a home is more than eight times the annual income of a family.

Affordable housing isn’t the only challenge Generation Z’ers face. Young people’s independence is hampered by student debt, rising rental prices, and a lack of savings.

In order to meet the seemingly sinister demands of the housing market, Generation Z homebuyers have had to adapt and evolve. Don’t worry: there is no shortage of tools and strategies that you can use. It all comes down to decisions. Understanding how to build credit, navigating the market, and understanding your values ​​will lead to any financial goal, home purchase or otherwise.

“What you’re doing now is really deciding where to start,” says Chris Rager, director of mortgage sales at AmeriSave, a nationally approved mortgage lender. “If you start ahead, it is much easier to stay ahead.”

Home ownership for Gen Zers 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 loan terms and rates you can get. Maintaining your overall credit profile is the most important factor in preparing to buy a home, Rager says. “A lot of people don’t realize that it’s not just about paying your bills on time, but also how you manage your actual debt, things like how high your credit card balances are,” says Rager.

Concepts such as credit utilization ratio, debt-to-income ratio, and employment history are essential to ensure that your borrower profile is strong. These concepts can be confusing. That’s why “it’s important to have an early start to have a great financial life,” says Rager.

This is especially true for college students who are likely to encounter debt for the first time in the form of student loans. These same students will likely open their first lines of credit through credit cards, and fail to save. “Don’t fall into this trap where you default on credit card debt, or you don’t pay your student loans when they’re due,” Rager warns.

“If you start badly, you’re in a hole and now you have to dig out of that hole,” he says.

Avoiding early financial pitfalls as well as thinking about how to finance a large purchase like a home can be overwhelming, but there are many misconceptions that contribute to this impression. While it certainly helps, you don’t have to have perfect credit and a large cash surplus. “At least 3% to 3.5% can get you home,” says Rager. In addition, Rager says, “there are government programs that can help you get a down payment,” as well as other programs to help first-time homebuyers. However, it should be noted that saving 20% ​​for the down payment can save a lot of money in the long run.

Anytime the down payment drops below 20%, “it generally means the borrower will have to pay private mortgage insurance, or PMI,” says Claire Lucy, an economist at Texas A&M University’s Texas A&M Real Estate Research Center. PMI is an additional fee added to mortgage payments each month until the borrower reaches a certain level of equity. It can usually be removed when you reach 20% of the home’s purchase value. Getting started with no PMI is a huge plus.

Step Two: Learn the Basics of the Housing Market

If there is any beauty to be discovered in the process of buying a home, it will not be found in its simplicity. This is where the experts come in.

With the right approach, finding a great home is at your fingertips, says Carrie Rabinowitz, a real estate agent in Charlotte, North Carolina.

“If you’re buying a home for the first time, you don’t really know what to expect and you don’t know how to prepare for a home purchase,” says Rabinowitz. A good real estate agent will be able to guide a buyer through a complex process and fill in any gaps in their understanding, as “some buyers don’t realize how competitive and confused they are until they are in the process.”

“Right now it’s the seller’s market, which means sellers have the advantage,” says Rabinowitz. In the seller’s market, sellers have the ability to completely ignore the offer “if it is not accompanied by a pre-approval letter”. A pre-approval letter is a certification that a buyer can purchase a home in a certain price range that must come from a reputable lender. To obtain a pre-approval letter, contact the lending agency. Together you’ll get an appraisal of the home you want to buy to certify its value, certify the title with the previous owner, and then inspect the home for damage. Obtaining this certification should be the first step you take in buying a home.

Rager says the sellers market “was driven by historically low rates that really drove home buying”. Combined with the remote working environment, people have been looking to relocate and have a better home.

The housing market today is still feeling the effects of the Great Recession since 2008. “Following the Great Recession, residential construction has essentially stopped, and we have not prepared the new housing units that we needed to add in to keep up with the family’s make-up,” Lucy says. This has left the supply of homes far below the demand, which has led to higher prices and competition.

It is unlikely that current market conditions will remain unfavorable for young buyers for much longer. Rager says historically low mortgage rates and high housing demand are unique circumstances due to a variety of factors, such as policy decisions and unique economic conditions during the COVID pandemic. As interest rates rise, it becomes more expensive to borrow, reducing intense competition. “Normalization will make the market more buyer-friendly,” he says. As the grotesque economy has begun to unravel in the past few years, the housing market has a chance to become more normal.

Step Three: Decide what’s important to you

Although home prices and interest rates may have disappointed some buyers, there are still many ways to find a home that meets any set of needs.

“People have to make concessions in all market sectors,” Rabinovich says. Due to the high level of competition, buyers have to think carefully about what they value in their home. “There are only three things that contribute to a home’s sale: its condition, its location, and its price,” she says.

condition

The good news is that the condition of the house can be changed. Buying a cheaper home and using the remaining money to renovate it can be an attractive option. When done well, you can completely transform the house. For those who don’t shy away from a project, an “overhead installation” can be an opportunity to truly personalize a new home without necessarily compromising on price or location.

Site

Unlike in the case of a home, the location of a home usually cannot be changed. However, with the growth of remote work, the location of the home may not be as important as it used to be. Homes closer to the city center tend to be smaller and more expensive than homes in the suburbs or even rural areas. Instead of compromising on these things, a larger home away from the city center can present a tempting option. For a generation whose lifestyle may not depend on proximity to an office building, the opportunity to have a bigger yard, a new home and a cheaper price may be very attractive to the new generation of homebuyers. As young Gen Z’ers begin their careers, you’ll have more home buying options if you focus on work paths that can offer remote work opportunities.

price

The price of a home is often the first thing potential buyers think of, and understandably so. By its very nature, the price of a home is a function of condition and location. Dealing with what you value at home is the first and most important step in finding one within a realistic budget that also meets your needs. “Trying to find creative ways to save money is going to be very important to these families going forward,” Losey says, so you have as much flexibility as possible when choosing your price range. “Inflation will be a major headwind for our younger families, because it will make it more difficult to save,” she adds, making an early start to saving more important to affordability in your desired price range. . Start by researching the city in question to understand what lifestyle to expect while living there. Reading about your dream city online or contacting a local real estate agent are great first steps.

The ‘perfect home’ is a home that you feel confident in purchasing and that fits your needs and budget. Sometimes the best finds are in places you’ll never look for.

Let’s make this happen

Owning a home is an impressive and achievable goal that anyone can set their sights on. Creating a plan to save money, build credit, and learn about personal finance are excellent steps to take.

Not everyone starts with the same circumstances, and as with most things worth doing, there will be challenges. However, there are always choices to make that can propel you all the way to home ownership, or whatever financial goals you have.

Knowing that you don’t know everything can be humbling, but it’s also an opportunity for growth. Not everyone knows how to use a credit card responsibly. It’s not necessarily obvious that buying a car at bad timing, switching jobs, or even making large and unexpected deposits can hurt your home ownership chances. These are the things that have been learned.

Ultimately, the housing market is not afraid of it. The real challenges will be found in creating a sound financial profile. For Generation Z, a common avoidable obstacle on the path to owning a home may be a lack of financial preparedness. Educating yourself about personal finance and building good financial habits will be the key to owning your first home.

Good financial habits take time to develop, but with commitment and curiosity, this is a path anyone can take.

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