Although we’re in the midst of a market correction, the future of the housing market is still up in the air—with many questions centering around first-time homebuyers.
While there are still individuals embarking on the journey of first-time homeownership, it’s less than what we’ve seen in the past. Recent data from the National Association of REALTORS®’ (NAR) Profile of Home Buyers and Sellers indicated that the annual share of first-time buyers was 32% in 2023. While this is up from 26% in 2022, it’s still down from the 38% high seen in 1981.
Not only this, but the average age of a first-time homebuyer is much older than historical averages. According to NAR’s Profile of Home Buyers and Sellers, the typical first-time buyer was 35 years old, ranging toward the older end of the millennial generation.
Younger generations—younger millennials and older Gen Zers (those aged 18 – 30)—have been closed out of the market due to a plethora of challenges, including, but not limited to: home prices, mortgage rates, inflation and the pandemic.
One of the big questions on the minds of many in the housing market is, “When will this group be able to break through the barrier and become homeowners?”
To gain further insight into what’s keeping younger generations from stepping into first-time homeownership, we asked a few economists to weigh in on the following question:
What changes do you think need to be seen in the housing market for younger generations to be able to become first time homebuyers?
Here’s what they had to say:
“While there was an increase in the first-time buyers’ annual share last year, these buyers were wealthier than first-time buyers have been in past years. There is a need for increased affordable housing inventory to bring in young buyers at all income levels. Homebuyers may have more opportunities in 2024 as mortgage interest rates have declined, which opens up the credit box for consumers. However, the total cost of housing needs to be taken into account, and home prices have risen amid the dearth of housing inventory.”
– Jessica Lautz, Deputy Chief Economist and Vice President of Research, NAR
“The biggest obstacle for younger home shoppers is affordability. Home prices remain more than 35% higher than pre-pandemic at a national level, and mortgage rates have climbed roughly three percentage points in the same timeframe. This means that the typical housing payment for a median-priced home in the U.S. has risen 90%, or roughly $1,000, over the last four years. This increase has pushed the recommended income to buy a median-priced home up more than $40,000, from $61,000 to $107,000.
“For housing to become more accessible for first-time homebuyers, it will be important to see for-sale inventory increase and mortgage rates fall. As inflation improves, mortgage rates will continue to float lower, taking some of the sting out of potential mortgage payments. However, an increase in for-sale inventory will be crucial to prevent increased buyer demand from pushing home prices even higher.
“Many current homeowners hold a mortgage with a rate more than three percentage points lower than today’s prevailing rate, and as a result, have chosen to stay put instead of sell their home. Homebuilders have increased new construction activity to help fill the gap, but inventory will likely remain a challenge for homebuyers. We expect mortgage rates to remain in the mid-6% range through 2024, which will likely keep both buyer and seller activity stifled. Though many markets will continue to be challenging for first-time homebuyers, we have identified 10 areas that offer first-time buyers desirability and affordability.”
– Hannah Jones, Senior Economic Analyst, realtor.com®
“I think the biggest constraint at the moment for many people, especially people who don’t have a lot of down payment or bigger incomes, is affordability. When you look at how much home prices have increased over the last couple of years, and then you add the impact of higher mortgage rates and mortgage insurance, you very quickly bump against affordability issues for many people. Building more homes is definitely one thing we generally need.
“In terms of first-time homebuyers building more starter homes, smaller homes, maybe attached homes like townhomes or condominiums, offering a variety of home styles would be one way. There was somebody from Lenar recently talking about how they’re now building 3D homes, and they’re building manufactured homes, but even manufactured homes these days look like regular stick-and-brick homes.
“The availability of credit has tightened significantly over time. This is something that’s been going on since the Great Recession, and it’s not really loosened in many ways. So when you look at homeowners, people that purchased homes during the pandemic, they generally tended to be more higher income folks. A lot of buyers these days may be having a hard time—especially if they don’t have intergenerational wealth—coming up with that down payment. Creating some credit opportunities for first-time homebuyers is also important.”
– Selma Hepp, Chief Economist, CoreLogic
“In this competitive market, it is definitely still going to be challenging for first-time homebuyers in 2024. Younger buyers are having to be creative to make the transaction work. Many buyers are going to make compromises on the type or location of homes they look at, looking at smaller homes (e.g. condos) or neighborhoods further out. Other buyers are looking for properties that would give them a rental stream—whether a home with room they can rent out or a two-unit property. Those buyers who can work remotely will continue to consider more affordable markets throughout the U.S. Finally, we’re also seeing that more and more baby boomers are taking equity out of their own homes to pass along to their adult children to help them buy their first home. We’ll probably see more of that in the years ahead.”
– Lisa Sturtevant, Chief Economist, BrightMLS
