Millennials face homeownership crisis amid soaring mortgage rates and affordability issues

Few milestones hold as much significance in life as owning a home in the American dream. Millennials, however, have faced challenges that perfectly reflect their generation’s struggles, many of whom entered adulthood during the devastating post-2008 job market. Just as they reached the age to buy homes, housing affordability has hit a 40-year low, and mortgage rates are near a 40-year high.

The anxiety around never owning a home deeply influences millennials’ overall perception of their finances and the economy, according to Mark Zandi, chief economist at Moody’s.

“If they feel like they’re locked out of owning a home, it colors their perceptions about everything else going on in their financial lives,” Zandi explains.

For years, millennials have struggled with an unforgiving housing market. They’ve experienced not one, but two major economic disruptions—the Great Financial Crisis of 2008 and the 2020 pandemic. Both left them financially shaken and struggling to afford homes. The Great Recession devastated the real estate market, leading to an economy nearly collapsing due to unstable mortgage-backed securities. The pandemic, on the other hand, triggered a surge in remote work, causing city dwellers to flee to the suburbs, which, in turn, inflated housing prices.

Failure to address the affordability crisis in housing will lead to millennials, who “already feel disenfranchised,” according to Zandi, losing faith in the economy and venting their frustrations toward President Joe Biden come Election Day. (We interviewed Zandi in light of his team’s analysis, predicting the 2024 election outcome based on economic trends.)

“Homeownership is just unaffordable,” Zandi says. “If it looks like affordability is getting worse and their prospects of becoming a homebuyer are diminishing, that’s going to undermine Biden’s reelection bid.”

In October, mortgage rates skyrocketed to their highest in over 20 years, surpassing 8%. For millennials, these rising rates, coupled with the cost-of-living crisis, made owning a home feel even more unattainable. Recently, however, mortgage rates have dipped to around 6.8%, offering prospective buyers hope that the housing market might become more manageable.

“When interest rates are at 6%, ‘people feel like they have a chance of becoming a homeowner at some point,’” Zandi says. “Mortgage rates are really very critical.”

Though still significantly higher than the 2.6% rates recorded in January 2021, these mortgage rates are expected to decrease further, with estimates predicting they may drop to 5.5%. Other economic indicators, such as declining inflation and a robust job market, also point toward positive economic changes.

With the decline in mortgage rates over recent months, things might become easier for millennials to afford a home, which remains a major priority for them. A December note from Bank of America Research revealed that homeownership matters more to millennials than it did to their parents at the same age. This generation especially values homeownership because it offers a way to shield themselves from other economic uncertainties.

“The goal of homeownership is increasing because of its importance as a respite from a volatile economic environment,” says John Walkup, cofounder of real estate analytics firm UrbanDigs.

While it’s not entirely impossible for millennials and Gen Z to buy homes, Bank of America Research finds that younger millennials, ages 28 to 35, are narrowing the homeownership gap compared to Gen X and boomers. There have been improvements since the pandemic, with homeownership rates for young people higher than in 2019, according to economist Dean Baker. However, these rates are still lower than before the 2008 housing crisis, reflecting that millennials have not fully recovered from the economic shocks they’ve faced.

Older millennials, in particular, bear the brunt of multiple economic setbacks and the current housing affordability crisis. They entered the housing market burdened with high student loan debts, while a recession hit just as they were beginning adulthood. One housing executive estimates that incomes need to increase by 55% to keep pace with rising home prices.

Homeownership is central to the American dream, not just for sentimental reasons but also as a key source of wealth. “Historically, real estate has been a sure-shot way of unleashing wealth…especially for the middle class,” says Monisha Rana, a real estate agent with Coldwell Banker Warburg in New York.

The typical homeowner’s net worth is 40 times higher than that of a renter, according to the National Association of Realtors. Selling a home, particularly if its value increases—as Morgan Stanley forecasts a 5% rise in home prices this year—can generate significant wealth for families whose net worth is tied up in their property.

Failing to own a home can have lasting effects on an individual’s long-term financial standing.

Homeownership taps into “more deep-seated feelings around the economy, particularly for younger people,” says Zandi. “If they can’t afford to buy a home, that really undermines their general thinking about everything else, when it comes to the economy—their job, their pay, their net worth.”

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