America’s younger generations may have missed their prime opportunity to own real estate. With mortgage payments up more than 50% in two years, Millennials and Gen Zers account for a dwindling share of new home purchases.

According to Creditnews Research’s latest report, Millennial and Gen Z homebuyers accounted for 45% of all home purchases in 2022, but that figure has since fallen to around 32% as of August 2023.

These generations own a mere 10% of the country’s real estate wealth despite having a combined population of around 140 million.

“The Fed’s aggressive rate-hike campaign has worsened the generational homeownership divide. Unlike Baby Boomers who can afford to buy in cash, Millennials and Gen-Z buyers need financing. That’s been harder to get with mortgage rates at 22-year highs,” said Sam Bourgi, Creditnews's Senior Analyst.

The impact of mortgage rates on generational home buying can’t be overstated.

According to Creditnews Research, more than 40% of all U.S. mortgages were obtained in 2020-2021 when interest rates were at rock bottom. Around that time, buyers could lock in a 30-year fixed-rate mortgage below 3%.

Fast forward to the second half of 2023, the same 30-year term carries a mortgage rate closer to 7% or 8%.

Lack of housing supply driving up prices

It’s not just mortgage rates that are taking a bite out of affordability. Home prices have also skyrocketed since the pandemic, with the average selling price of a U.S. home still above $500,000, according to Fed data.

“Homeowners refuse to sell because they don’t want to trade their low mortgage rate for a much higher one. So, whatever housing supply makes it to market comes at disproportionally higher prices,” Bourgi said.

Part of the problem is low inventory. Industry experts say a housing market is healthy when there is between 5 and 6 months of supply. At the current sales pace, housing inventory is roughly half of the desired level, according to Redfin data.

Not only that, supply shows no signs of picking even with slowing demand. According to Redfin, October inventory levels were down 8.7% year-over-year to 1.55 million units.

In these market conditions, younger first-time buyers are at the bottom of the totem pole. To afford a typical home, they need a bigger down payment and higher incomes just to qualify.

Where are mortgage rates headed?

While some experts say rates may have already peaked, the gap between the average 30-year mortgage rate and the effective mortgage rate—the average interest on all outstanding mortgages—is the largest since 1976, according to Creditnews Research.

With the gap so wide, homeowners are “staying put because moving would mean taking on a rate that’s twice as high,” according to Chen Zhao, Redfin Economics’ research lead.

Economists at Goldman Sachs believe mortgage rates will trek lower in 2024, but not enough to lure Millennials and Gen Zers back into the market. Analysts Roger Ashworth and Vinay Viswanathan recently predicted that the 30-year rate would fall to around 7.1% by the end of next year.