Millennials in the U.S. face challenges in affording homes: "The playing field is not level"

Tim Khalil and Kelcie Lesko recall the instance when they abandoned the idea of purchasing their first home.

In June 2023, U.S. homebuyers were racing against time to secure the best deals on a limited number of properties available on the market. With rising mortgage rates and soaring house prices, many buyers resorted to making all-cash offers. Lesko and Khalil, a New Jersey couple, had already lost out on approximately 15 bids on properties in Monmouth County at that point.

Lesko, 28, who works in marketing, says, "We were just getting blown out of the water." They had stretched their original budget from $300,000 to $380,000, and had been offering tens of thousands over list price to keep up with other bids.

Khalil, a 30-year-old police officer in North Brunswick, sensed that a "beautiful" two-bedroom house with lots of space and a backyard was "going to be the one" after their last offer. They offered $380,000 on the $315,000 residence and shook the hand of the seller, who said it was between them and another offer.

Lesko says, "When their offer was rejected, it felt like a slap in the face, with the message 'Wake up, this isn't meant for you.'"

They opted to cease their search for a residence. In contrast, they remain in a two-bedroom apartment that costs approximately $3,000 per month.

"Lesko says, "Although we both have good jobs and make good money, I believe that the current real estate market makes it difficult for us to become homeowners.""

Many frustrated would-be buyers in their late 20s to early 40s, like Lesko and Khalil, find themselves priced out of homeownership despite doing everything "right."

The 2008 financial crisis and its aftermath affected most millennials as they entered adulthood. This generation faced challenges such as a tough job market, low wages, and high student debt, which made it difficult for them to save.

First-time homebuyers face a very different real estate market than their parents

First-time buyers, including boomers and Gen Xers, have always found homes to be a significant expense. However, what has changed is that houses, in addition to college tuition, rent, and healthcare costs, have become even more expensive, even when adjusted for inflation.

Since 1985, home prices have grown twice as much as incomes, resulting in wages not rising fast enough to keep up.

The average 30-year fixed mortgage rate has more than doubled from historic lows of around 3% in 2020 to a high of 7.6% in October 2023, but has since come down slightly to 6.2%.

According to Daryl Fairweather, senior economist at Redfin, it is not feasible for a first-time homebuyer from the middle class to afford a home currently, given the high mortgage costs in relation to typical family earnings.

In 1990, the median house price in the U.S. was only 2 times the median annual income of $80,000, while now it is 5.8 times more.

It takes millennials longer to save for a down payment due to larger mortgage payments, with the cost of a 20% down payment ranging from $74,000 to $140,000, excluding closing and other expenses.

In January 2024, Kelly Diehr and her husband set a budget of $600,000 for a Denver-area home, believing it would be sufficient given the median price of a house in the area at the time.

According to Diehr, when you enter the market, you come to the realization that you must abandon your dream of purchasing the ideal home you had envisioned, as six figures no longer suffice to buy a home in today's market.

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In order to improve their chances of winning the bid, the couple increased their budget by investing in stocks. As a result, they were able to purchase a brand new three-bedroom home for $789,000 in April 2024. Through negotiations, they were able to secure $47,000 in seller credits, which they used to lower their mortgage interest rate to a more manageable 4.25%.

Although Diehr is grateful for being able to make it work, they had to withdraw from their retirement savings and spend an additional $200,000, which exceeded their original budget.

Many major U.S. cities are only affordable to the highest earners

Many young Americans are drawn to big cities like Los Angeles and New York due to the abundance of job opportunities, higher salaries, and the chance to encounter diverse individuals. However, even affordable housing in these cities may appear to be reserved for the wealthy.

In 2021, the CEO of a marketing and public relations company, Ochart, purchased a detached, two-bedroom house in San Antonio for approximately $275,000. At the time, he was able to secure a 30-year fixed mortgage rate of 2.86%, significantly lower than the nearly 8% banks charged in 2023.

Ochart's ability to accomplish that was due to historically low mortgage rates, resulting in a net profit of about $100 per month from renting out the home.

In LA, Ochart found that the condo listings within his price range were not in his preferred neighborhoods and often required renovations or came with high homeowners association fees for repairs. He discovered that newer places within his budget were studio apartments that were smaller, around 350 square feet, and lacked much closet space.

In early 2024, Ochart abandoned his plan to purchase a condo in LA, which would have resulted in monthly mortgage payments of approximately $3,500 to $4,000. Instead, he opted for a rental that costs around $2,100 per month, significantly less than what he would have spent on a home.

Ochart remarks that it's a Catch-22: although smaller cities may offer affordable housing, moving to larger cities with job opportunities often results in being priced out.

The median price of a home in Los Angeles county is $959,000, which is 13.8 times the median annual household income of $70,811 in that county, according to the latest U.S. Census data.

According to Ochart, it's not a fair comparison to compare the income needed to buy a home between the boomers, Gen X, and current generations, as it's like comparing apples to oranges.

It's not just big cities that have become unaffordable

The "pandemic darlings," including mid-sized cities like Boise, Tacoma, and Grand Rapids, experienced significant growth in median home prices. In Grand Rapids, home prices rose 54% from 2020 to $285,000 in June 2024, according to Zillow sales data.

Timothy Ham, a 40-year-old army veteran and network security engineer, had to relocate to Kalamazoo, an hour's drive away, due to the rapid home price growth in Grand Rapids.

In 2022, Ham found it challenging to locate a one-bedroom rental in Grand Rapids for approximately $700 per month. However, he discovered that for the same amount, he could purchase a $100,000 home with a VA loan that did not require a down payment.

Ham found affordable places in Kalamazoo, where he bought a two-bedroom house for $79,000 with monthly mortgage payments of $635, while the only affordable options in Grand Rapids were "uninhabitable."

Ham secured monthly payments lower than most Americans pay, but living in Kalamazoo meant driving an hour each way to work and residing in a "rougher neighborhood" with regular gunfire.

Despite his love for Kalamazoo and satisfaction with owning a home, the experience left him feeling frustrated.

"Ham expresses his disappointment that despite being born and raised in Grand Rapids and serving in the military for 20 years, he is now being told to leave and find another place to call home. However, he acknowledges that at the end of the day, a solution must be found."

First-time buyers are now wealthier, more likely to get family help

Certain prospective homebuyers are more likely to succeed due to the combined influence of these factors.

A 50% increase in the past four years means that Americans now need to earn approximately $111,000 to afford a median-priced home with a 20% down payment, according to Bankrate. In order to keep up with these prices, 36% of millennial and younger homebuyers are relying on family help to cover down payments, which is a significant increase from the 18% that relied on family help in 2019, according to Redfin.

At the expense of lower-income buyers and people without family help, financial support enables them to enter the market sooner, secure better mortgage terms, and compete more effectively for a limited number of homes.

First-time buyers are becoming older and the share of first-time homebuyers has declined since the 1980s.

According to Lawrence Yun, the chief economist at NAR, it is predicted that we will need approximately 1.8 million new housing units for five consecutive years to eliminate the housing shortage deficit. Experts anticipate that prices will continue to rise until this gap is filled.

Revisiting the American Dream: 'It doesn't make sense to spend that much money.'

Those who can't afford to buy may experience a blow to their self-esteem, while some may prioritize keeping up with the Joneses over other financial objectives, such as saving for retirement.

"According to Ramit Sethi, the concept of owning property is deeply ingrained in American culture and is often overlooked when making home buying decisions."

Homeowners often regret their housing purchases due to unexpected expenses, according to a recent survey by Bankrate.

Klontz suggests considering alternative investments instead of trying to buy a home due to its affordability. He questions the notion that owning a home is a necessary step to achieving success.

"Ochart says that for him, real estate is not just about finances but also about personal satisfaction. The low-interest rate home he secured in Texas provides him with a sense of safety."

He argues that it doesn't make sense to spend a lot of money on a place if you don't love the space and the neighborhood.

Kelcie Lesko and her husband are "devastated" by the state of the real estate market, even though they believe it's better not to buy a home at the moment.

Although interest rates may decrease, it is unlikely to immediately impact housing costs. It is predicted that home prices will increase by 15% to 25% in the next five years, primarily due to the imbalance between supply and demand, as stated by Yun, NAR's chief economist.

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