Buying real estate in the United States has become a major challenge for millennials. Competition is coming from investors and Gen Zers who are purchasing most of the starter homes on the market. This coupled with rising prices seems to have millennial home hunters changing their approach to property ownership.
Competition on The Housing Market
Research by the New York Times uncovered that investors have been buying up about 20% of the available starter homes. Often investors are paying in cash and even bidding before homes have been put on the market.
Data shows investors are actively buying homes in the bottom third of the market. These are often starter homes that help younger, less financially able home buyers get into the market. Moreover, investors are buying about half of all the affordable homes for sale and 25% of single-family homes.
These same investors use their new property in a variety of ways, including flipping it, renting it, or reselling at a later date when the property is worth more money.
In 2018, starter homes represented just 20.9% of the real estate available in the U.S. Because the market currently favors sellers, housing prices are high and there are few properties available for younger home buyers.
Other factors that are causing some stress in the real estate market is the increased cost of construction, tight zoning rules, and changing demand from consumers. All these things have made it tough for millennials to get their foot in the door with a small home.
Millennials are also going to start feeling the pinch from Gen Zers who are coming of age and getting ready to buy their first home. A survey has shown that these younger home buyers are optimistic about their chances at homeownership. About 40% have already been saving, though they have less than $10,000 on average.
Statistics show that 100,000 Gen Zers already own a home while over 80% of those surveyed indicated they plan to buy a home within five years. Moreover, the Gen Z generation proves to be ambitious when it comes to matters of real estate as over 90% of them were able to save for a down payment in under five years.
Millennials are already struggling financially with student debt, high living costs and more, which can seriously impact their ability to pay for a home. Having to compete with real estate investors and the following generation are hindrances that leave many out of the market.
Millennials on Financial Backfoot
The financial picture for millennials also puts them in a tough spot when it comes to buying their first home. Statistics show that young home buyers today will be paying 39% more than first-time homebuyers 40 years ago.
Moreover, depending on the real estate market a home buyer wants to get into, research has shown it can take up to 43 years to save up for a down payment. This is based on the fact that most save less than 5% of their monthly income for a down payment.
In addition, income levels and home prices have not increased at the same pace. As housing prices continue to rise, the amount needed for a down payment also increases, putting millennials in a tight spot.
Millennials Bypass Starter Homes
When compared to other generations, Millennials are 8% less likely to be homeowners than previous generations, one study has found. Researchers noted that the homeownership rate is 5% less among highly educated millennials than it has been the past two generations.
The report also notes that young homebuyers have changed their attitude, with the number of homeowners declining among married millennials. Having a family is usually something that pushes people to buy a house and the fact that millennials are not moving in that direction demonstrates they have different views on homeownership than previous generations.
There are several other ways that millennials are responding to the challenges of buying their first piece of property. Most commonly, they opt to rent for a longer time and buy later, which gives them plenty of time to save up more money. By doing so, it allows them to bypass the starter home market and purchase a luxury home instead, according to Business Insider. Rather than buy a starter home, millennials are waiting longer, saving more, and paying for houses they will live in for the long-term.
Another response by young property buyers has been to rent in the city and buy vacation homes rather than a permanent residence. Yet others are counting on financial gifts from friends and family to help them cover the costs of buying a home.