Are America’s Housing Markets Ready for Generation Z?

by Steve CookNovember 23, 2018

Millennials (people born between 1981 to 1997 and formerly the largest generation in the nation’s history) are changing the nation’s housing markets. Their preference for city living drives up demand in neighborhoods, encouraging new urban development and adding millions to the value of city properties. There are so many millennials looking for housing that for at least the past three years, they have been powering rising rents and home prices simultaneously.

Graduates wear graduation gowns,Ceremonies of university graduates.

But, are America’s housing markets ready the millennials’ younger sisters and brothers?

The next generation called Generation Z (born between 1995 and 2010), is even larger than the millennials. Currently, Generation Z makes up about 25 percent of the U.S. population. The 65 million-to-75 million young people who make up Gen Z have learned a few things about buying homes from the experiences of millennials. They are adjusting their plans to avoid problems that plague millennial buyers.

Gen Zers are eager to buy as soon as they can to avoid becoming captive to renting for years to save for a down payment to find an affordable home. They avoid long waits to save for a down payment by using low down payment options and asking their families for a gift or a loan. They are more willing to compromise on location and features to speed up the process of finding a first home.

In a PropertyShark study, Gen Zers said student loan debt and saving for down payment were biggest home buying barriers. Millennials believe down payments are the top barrier and student debt is number two. Perhaps, the growing awareness and widespread use of lower down payment mortgages has made saving for a down payment less of a problem for Gen Zers.

Because of its size and its member’s determination to become homeowners quickly, Generation Z may have a greater impact on the way homes are bought and sold in America than the Millennials. New research suggests Gen Zers have learned a few things from the Millennial struggle with debt and affordability.

Like Millennials, Gen Zers are very committed to becoming homeowners. Will they succeed?

In 2010, when the oldest millennials were 29 and the bulk of the generation started to enter home buying age, 87 percent of them expected to become homeowners and 33 percent planned to rent. But by 2018, only 42 percent had bought homes.

A long list of problems have made home buying difficult for millennials from a lackluster economy that forced them to delay forming households, crippling amounts of student loan debt and consumer debt, tighter lending standards, soaring prices of starter homes, and a drought of affordable homes.

Student debt is a problem for millennials, but it’s an even bigger problem for Gen Zers

Burdened with the highest levels of student debt in history, millennials, with tens of thousands in student loan debt, end up locked into the rental market far longer than previous generations. But things are even worse for the Gen Zers.

Nearly three-quarters of college students today graduate with debt. The average student loan borrower from the class of 2015 (among the youngest millennials) owed $34,000, up from an average of $20,000 a decade before.

Student loan debt continues to soar. From $1.4 trillion at the end of 2017, the total national student loan debt could reach $2 trillion by 2021. The average student in the class of 2016 has $37,172 in student loan debt. As student loan debt has increased, so have delinquency rates. Nationwide, the share of loan balances unpaid after three months exceeded 10 percent in the fourth quarter of 2017.

Gen Zers have witnessed what student loan debt is doing to millennials’ quest for home ownership. Millennials are typically carrying a student debt load of $41,200, which is more than their annual income of $38,800. A recent study by the National Association of Realtors and the nonprofit America Student Assistance agency found that student loan debt is delaying home ownership for millennials by an estimated seven years.

Only 65 percent of Gen Zers believe the benefits of graduating college exceed the costs. In addition, a recent study found that 39.18 percent of Gen Z borrowers answered either no or unsure when asked if they would be able to fully repay their student debt. Another 52.94 percent said they believed they will be helped by federal student loan forgiveness programs when in reality, less than 10 percent of borrowers will be aided by forgiveness.

Gen Zers are in a hurry to buy and settle into home ownership

Most millennials rented first or lived with their parents until they bought a home. Years later, many are still unable to scale the barriers that are forcing them to keep their dreams on hold.

Some 83 percent of Gen Zers plan to buy within five years even though the oldest Gen Zer is only 23. Meanwhile, the share of millennials who plan to buy homes in the next five years is only 4 percentage points higher than Generation Z home buyers, at 87 percent, even though millennials have had considerably more time to accumulate wealth and climb the career ladder.

Five years ago millennials were not as ready to buy. In 2016, 11 percent were still living with their parents. By 2018, only 37 percent of millennials owned a home. A late start, student loan debt, and rising rents that make it difficult to save for down payments are some of the reasons. Millennial home ownership was about eight percentage points lower than Gen Xers and baby boomers at the same age.

Young couple buying new home.

Today’s Gen Zers are in a hurry to become homeowners. Those who do buy do so quickly. Less fortunate Gen Zers use every angle, from getting some down payment help to getting the best deal that they can. More than two-thirds of Gen Z buyers spend less than three months searching for a home before purchasing one, compared with 54 percent of millennials and less than half of both Generation Xers (born between 1965 and 1976) and baby boomers.

Gen Zers are getting a jump on down payments with gifts from their parents and low-down payment mortgages while most millennials struggle to save

Nearly 67 percent of Gen Zers used a gift or loan from a family member or friend as part of their down payment. They get low down payment loans, so they plan to save less than if they were putting 20 percent down.

Millennials expect they’ll need $41,0000 for a down payment. Only six percent of millennials expect they’ll need to save for between five to 10 years to afford a down payment, but not Generation Z. Some 93 percent of Gen Z buyers saved for less than five years for their down payments.

Only 14 percent of millennials used family gifts, according to a September 2017 Nerdwallet study, but nearly one-in-three millennial homeowners (29 percent) have dipped into their retirement funds for down payments. One reason millennial renters struggle to save is rising rents. Nearly half of households headed by people 18 to 34 are rent-burdened, meaning that more than 30 percent of their paycheck goes to their landlord.

The share of millennials who plan to buy homes in the next five years is only four percentage points higher than Generation Z home buyers, at 87 percent, even though millennials have had considerably more time to accumulate wealth and climb the career ladder.

Gen Zers are making smaller down payments

Some 72 percent of first-time home buyers purchased their homes with a down payment of 20 percent or less in September, according to NAR’s Realtor Confidence Index. On average, millennials expect they’ll need $41,000 for a down payment, about 10 percent more than Gen Z.

Gen Zers are using more low down payment programs and loans than older buyers. Half of the youngest respondents in the PropertyShark survey paid less than $10,000 as a down payment, compared to 31 percent of Millennials and 28 percent of Gen X. An additional 41 percent of Gen Zers spent between $10,000 and $50,000, with only 12 percent investing more than $50,0000 on a down payment.

Both Millennials and Gen Zers are looking for larger and more expensive houses than they can afford. But Gen Zers have a bigger problem.

Millennials are more realistic regarding square footage versus budget in the PropertyShark study. Millennials look for homes 1,884 square feet in size but can afford only 1,071 square feet or less. Gen Zers can afford just a little bit less than millennials – 803 versus 812 square feet – but they want homes 1,278 square feet larger.

When asked what they would be willing to compromise on when buying a home, space was the least likely aspect for Gen Z respondents to give up. This is understandable, considering that the overwhelming majority of this generation grew up in larger homes than any before, with many never having shared a bedroom. Furthermore, those that have moved from the parental home into rentals are mostly forced to share living space with roommates and want a return to more space and privacy.

Image result for generation Z and homeownership

Location drives millennials beyond their budgets; Gen Zers are more willing to compromise on where they live

Gen Z has an affinity for suburbia, with nearly 60 percent preferring it, followed by urban living with 30 percent. Many millennials choose to live in high-cost city centers. Between 2005 and 2015, many millennials moved to city centers with greater urban amenities and job opportunities—and where homes are in high demand and expensive. This shift in geographic preference is mostly observed among highly educated millennials.

While location is non-negotiable for many millennials, Gen Zers would sacrifice location and an easy commute for space and amenities. Both Gen Zers and millennials shun rural and small-town life―all signs point to continued urbanization, while rural and small-town communities shrink.

Gen Zers are willing to spend some sweat equity and compromise on house features to save money

Gen Zers will buy a fixer-upper if the price is right. They’ll trade amenities for more house for the money and less money for the house. Gen Z views home ownership as the most important piece of the American dream. More than three quarters of them are willing to sacrifice starting their own business in favor of owning their own home if they must.

Two opposing approaches to home ownership

Two generations so close in age have diametrically opposite approaches to home ownership. Each grew up at different times, which taught them different lessons about buying a home.

Those of the Millennial Generation vividly remember foreclosure signs on neighboring homes, and school classmates disappearing as their families defaulted on their mortgages and moved to find new shelter as fast as possible. They saw what can happen when homeowners pull every penny of equity out of their homes or take unreasonable risks. They were the first generation to learn first-hand that housing values don’t always rise and that owning a home, like many things in life, involves managing risk successfully. They grew up with a cautious opinion of home ownership. Hard times followed them into adulthood. After growing up in the worst housing recession since the Great Depression, they have a lot to learn from the worst sellers’ market in a generation.

Gen Zers came of age during the housing recovery. They saw the real estate economy slowly improve and create windfalls for buyers with the confidence to buy when housing markets were in shambles. It took a decade for home values to return to their boom-time peak prices, but it was worth it. Gen Zers are in a hurry to turn their first homes into good investments. They view their first home as a learning experience and the first step in a lifetime of home ownership success.

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About The Author
Steve Cook
Steve Cook is the editor of the Down Payment Report. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.

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