Is it Easier for Gen Z to Buy a House? How This Generation Approaches Homeownership

Remember back when people used to write about how the younger generation would be able to afford a home - if only they gave up their avocado toast and Starbucks lattes?

While the advice may have encouraged millennials to re-examine their spending habits, it ignored the reality of the situation: that crushing student loan debt, stagnant wages, and the rising cost of housing were the more obvious holdups.  

Now there's a new cohort in town: Generation Z, or those born from 1997-2012. When it comes to affording a home, how does Gen Z compare to millennials (1981-1996)? Data suggests that despite the housing market feeling quite unaffordable right now, Gen Z - whose oldest members have just reached age 25 - actually has more buying power than millennials did at the same age. 

The Data: Gen Z Home Buying Power

To figure out how Gen Z’s home buying power compares to millennials at the same point in their lifetime, let's compare the cost of a 25-year-old buying:

• A $600,000 home in Fairfax, VA 
• Using a 20% down payment

We compared prices and rates in 2006 (25-year-old millennials) and 2022 (25-year-old Gen-Z).

(Note: we are not saying the average 25-year-old is typically buying a $600,000 house with 20% down. This is just a benchmark for the data - and Gen Z is not old enough yet to do a comparison of age 30 vs 30.)

Adjusting for inflation, the 2006 reference home in Fairfax, VA would:

• Be 18.7% more expensive by purchase price (in today's dollars) 
• Have a 32% higher monthly payment (in today's dollars) 

In 2006, millennials were still experiencing the real estate bubble preceding the Great Recession - which made it incredibly difficult to afford a home, even harder than it is for Gen Zers right now. Later on, millennials ended up having a historically good home-buying window as they aged into their 30s. It remains to be seen how the market progresses from here as Gen Z reaches comparable ages.

Gen Zers eager to enter the housing market (and there are many of them) might find solace in this historical data, which reveals that their situation is better now than it was for millennials at the same point in time - plus, the market eventually shifted and gave millennials more affordable options. Hopefully, the future will afford Gen Z similar opportunities. 

However, make no mistake - homes today are expensive. They're just comparatively cheaper than they were at the same point in time for the previous generation. Home prices are rising much faster than income. Over the past half-century, median income in the U.S. rose by 15%. During that same time period, though, the median home price rose 118% (Bankrate). 

A Shift in Sentiment: Gen Z Wants Homes Soon

About 87% of Generation Zers want to own a home in the future. Comparatively, only 63% of millennials hold that same aspiration (National Mortgage News). Of course, the millennial generation came of age during one of the most dramatic housing crashes in US history, followed by a global recession - it’s hardly shocking that they may need additional time to warm up to the idea of homeownership.

Gen Z, on the other hand, was fairly young when the last crash happened and has instead experienced lower interest rates and a growing generational interest in saving money and investing thanks to a proliferation of Youtube, TikTok, and Instagram accounts covering these topics and making them more accessible and approachable. 

Gen Z is also entering the workforce precisely as many sectors shift to a work-from-home model, giving Gen Z greater flexibility when it comes to where they buy their future homes. When millennials were in their mid-20s, required commuting may have prevented them from buying homes in more affordable areas.

In 2012, The Atlantic’s piece The Cheapest Generation came with the byline “Why Millennials aren’t buying cars or houses, and what that means for the economy.” In 2016, The Guardian continued to worry: "Millennials aren't buying homes right now. What if they never do? " The overwhelming sentiment at the time was that millennials weren’t interested in homeownership because they couldn’t afford it. 

Today, the tide has turned. Millennials have moved further along in their careers, shed some of their student debt, and are ready and eager to buy houses. And according to the most recent Census data, 48.6% of millennials now own homes. While they may not be quite as optimistic as Gen Z is when it comes to homeownership, the majority are making strives toward leaving the rental cycle.

How Can Gen Z Prepare for Homeownership?

Though many Gen Zers may want to own homes now, most are waiting until things cool down and/or they have enough money saved for both the down payment as well as closing costs. So how can they better prepare themselves for the day they're ready to put in an offer on a house of their own?

1. Don't Wait to Run the Numbers

Having a realistic expectation of cost is key, but Gen Z consistently underestimates how expensive it is to buy a home. Rocket Home’s data shows that Gen Zers think their home will cost 38.5% less than the U.S. median home value - a misconception that might encourage them to save less than they really need to.

Even though about half of Gen Zers polled want to buy a home within the next 5 years, it’s going to be difficult if they don’t save up the many thousands of dollars needed to cover closing costs and the minimum down payment. 

The average home price in the U.S. is currently $374,900. Closing costs are typically 3-6% of the home price, and 3% is the minimum down payment required. If they put down less than 20%, they’ll need to purchase private mortgage insurance (PMI). Additionally, home experts recommend having at least 1% of the home’s price set aside each year to cover repairs and maintenance.

So for the median home, a Gen Z buyer would need: 

• Closing costs: $11,250-$22,500
• Down payment: $11,250
• First-year maintenance: $3,749

So the bare minimum a Gen Zer would want to have saved up would be $26,250 - $37,500. Of course, all these costs are variable - depending on where they want to buy a home, and what sort of home they want, these prices could rise or fall. Overall, though, Gen Z can expect to need many thousands of dollars in the bank.

2. Improve Your Credit Score

Gen Zers should use their time now to improve their credit score. Saving money is important, but without a decent credit score, buyers can effectively be shut out of the market. Credit score not only impacts how much you’re allowed to borrow, but also the interest rate you receive. Someone with a bad credit score can expect a higher mortgage payment every month, due to receiving a higher rate. 

According to Experian, Gen Zers have an average credit score of 679. Using an example of a $300,000 30-year mortgage, Bankrate’s data indicates that this score would land a homebuyer with a 5.366% APR (as of April), a $1,678 monthly payment, and $304,163 in interest over the life of the loan.

If this same homebuyer could get their score up to 760 or above, they would be eligible for a 4.753% APR with $1,565 in monthly payments and $263,574 total interest over the life of the loan. 

That's a savings of $113 every month, or $40,589 total.

The minimum score you need for a conventional mortgage is 620 (though with some programs you can go lower). 

"I've had far too many experiences where people have money and think they're ready to go, and credit is the last thing they consider. And despite all their savings, they can't get a loan - or they can get a loan with a very high interest rate - and it changes their whole outlook," warns Virginia-based Realtor Brian Bauer. "You might have money and you might be ready to rock, but if the bank isn't going to lend you any money, it makes no difference."

Talk to a mortgage advisor

3. Learn from Others 

Gen Zers should talk to friends and family who have recently gone through the process of buying and owning their first home - to see what they can learn, and what mistakes they should avoid. 

About 64% of millennials report having regrets about their home purchase, with those regrets ranging from “bad location” to “mortgage payment is too high.” Considering a home is one of life’s most significant investments, keeping the regrets to a minimum is ideal.

4. Prepare to be a Savvy Buyer Who Shops Around

Gen Zers have an advantage over other generations: they're the first generation to grow up fully immersed in the internet. As avid researchers of anything and everything, Gen Zers are well-positioned to do their homework when it comes to buying a house. Many potential homebuyers don't realize that their homebuying experience can vary widely depending on the Realtor, brokerage, and lender they opt for.

• Our guide 15 Essential Questions to Ask a Realtor walks through the important questions to ask - and why it can pay to interview potential agents before actually choosing one to work with.
• Every brokerage takes a different approach - so it's worth doing your research. Houwzer's agents, for example, are salaried - this helps them focus on buyer goals, not commissions. 
• Did you know that shopping around to different lenders helps you get a better rate - and save you thousands over the lifetime of your loan? Yet only 44% of borrowers actually shop around. Of course, going to multiple lenders can be time-consuming - which is why many people will go through a mortgage broker.

So: What Can We Expect From Gen Z?

Demand for housing isn't going to go anywhere soon as Gen Z age up and begin looking for homes of their own. Average rent prices rose a record-breaking 17.5% last year, creating a sour experience for Gen Zers who find themselves scrambling to find affordable housing. This may help sway this generation further toward homeownership as a way to escape landlords, pet restrictions, inflexible leases, and everything else that comes with renting.

For Further Reading

• Can I Use My 401k to Buy a House? (and if so - should I?)
• Summer 2022 Housing Market Outlook
• Buying a House While Renting an Apartment: Read This First