Have young Americans missed their best chance at homeownership?

Most younger Americans may have missed their best chance at homeownership.

With mortgage payments up more than 50% in two years, Millennials and Gen Zers account for a dwindling share of new home purchases, recent data shows.

According to a recent report from Creditnews Research, Millennials and Gen Zers made 45% of home purchases in 2022, but by August 2023, that dropped to about 32%.

Despite being the prime home-buying demographic of around 140 million, these generations collectively own only 10% of the nation's real estate wealth.

“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 effect of rising mortgage rates on the generational divide can't be overstated.

Creditnews Research found that over 40% of all U.S. mortgages were secured during 2020-2021, when interest rates were historically low. During this period, buyers could secure a 30-year fixed-rate mortgage for less than 3%.

Today, the same 30-year term carries a mortgage rate closer to 7%.

Chronically low inventory driving up housing costs

It's not just mortgage rates squeezing affordability. Home prices have also surged since the pandemic, with the median U.S. house still selling for over $400,000, according to the latest Fed data.

"Homeowners are holding onto their properties to keep their low mortgage rates, which drives up prices for the limited homes that do hit the market," explained Bourgi.

A key issue is chronically low inventory, which isn't improving fast enough. Housing markets thrive with approximately 5 to 6 months of supply, yet current levels are half that, reports Redfin.

For younger buyers, these conditions mean bigger down payments and higher incomes are essential to qualify for a typical home.

The current mortgage rate is a smoke screen

While mortgage rates plateaued, the gap between the current 30-year rate and the effective mortgage rate—the average interest on all outstanding mortgages—remains the largest since 1976, according to Creditnews Research.

With the widening gap, 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 and other major banks believe mortgage rates will eventually trek lower, but considering record home prices, that may not be enough to lure Millennials and Gen Zers back into the market.

Meanwhile, the Fed's dialed-back forecasts for rate cuts mean mortgage rates are likely to stay higher for longer. Some economists go as far as calling higher rates the "new normal."