The age-old “House Hunters” joke is a simple one: A husband and wife each have a ludicrous career and an equally ludicrous budget to buy their dream home.
For example: One spouse tunes harmonicas part time, the other trains hamsters — but, somehow, their home-buying budget is $1.2 million. Fans of the HGTV show have for years been puzzled by the number of participants who can afford a big budget while working jobs that seemingly lack big salaries.
Redfin has one potential explanation: family money.
About 38% of recent homebuyers under 30 years old used either a cash gift from a family or an inheritance to afford their down payment, according to a Redfin Corp. (Nasdaq: RDFN) survey of people who bought a home this spring.
“First-time homeownership has become increasingly expensive, which has shut the door to homeownership for young people without family money,” said Redfin Economist Daryl Fairweather in a blog post on Redfin.
That makes a large share of young people so-called “nepo homebuyers,” who can use family money to help grow their wealth and purchase a home. That has helped contribute to intergenerational wealth inequality, Fairweather added.
Another 2021 survey by Redfin found 79% of homeowners at that time had a parent who owned a home, and 67% had a grandparent who owned a home.
“Many young people buying homes today had grandparents who bought homes before the Fair Housing Act was passed, when it was still legal to discriminate against homebuyers on the basis of race, religion, national origin, disability status or family status. And since homeownership persists across generations, the inequities of the past live on,” Fairweather said.
Housing is increasingly unaffordable
The reliance on gifts and inheritances to buy a home comes as houses are less affordable than ever.
Potential buyers are suffering a double whammy of years of record price increases and a mortgage rate that’s more than doubled in recent years, going from around 3% during the pandemic to now being above 7%.
A recent report by housing data provider Attom found homeownership expenses now account for 35% of the average American worker’s pay. Most lending standards call for a 28% debt-to-income ratio. In 2021, major homeowner expenses stood at about 21% of an average worker’s income.
In the U.S., homes were less affordable across 99% of counties in the third quarter of this year than the historical average.
“The dynamics influencing the U.S. housing market appear to continuously work against everyday Americans, potentially to the point where they could start to have a significant impact on home prices,” said Rob Barber, CEO of Attom. “We clearly aren’t there yet, as the market keeps going up and the slowdown we saw last year looks more and more like a temporary lull. But with basic homeownership now soaking up more than a third of average pay, the stage is set for some potential buyers to be priced out, which would reduce demand and the upward pressure on prices. We will see how this shakes out as the peak 2023 buying season winds down.”
The median sales price for a home in the U.S. skyrocketed during the pandemic, going from $322,600 in the second quarter of 2020 to $479,500 by the end of 2022, according to the Federal Reserve Bank of St. Louis. It has since fallen somewhat, to $416,100.
But sales price obscures how much potential homeowners have to pay for a house. For example, a $300,000 house with a 30-year mortgage, 7% interest rate and a 20% down payment would work out to a roughly $2,000 monthly payment. Just a year ago, an interest rate of 3.5% would have made that same house cost $1,347 per month.
Homeownership rate is slipping again…
The rate of homeownership in America has been, and remains, volatile.
It peaked at 69.2% in 2004 but dropped to 62.9% in 2016. It spiked during the Covid-19 pandemic, to 67.9%, but has since dropped to 65.9%.
And views on homeownership are becoming bleak among younger generations who believe they will never own a home. About 18% of millennials and 12% of Gen Z said they would never own a home, according to a separate Redfin survey. About 46% of millennials and 33% of Gen Z said their lack of ability to save for a down payment was a barrier, while about one-third said mortgage rates are too high. The No. 1 stated reason was that homes are too expensive.
“The worsening housing affordability crisis has an outsized impact on Gen Zers and millennials because they’re much less likely to own a home than older generations,” Fairweather said in a news release. “That means many young Americans don’t benefit from rising home prices by gaining equity. Instead, these would-be first-time homebuyers bear the burden of high prices, high down payments and high monthly mortgage payments, without profits from a previous home to offset the cost.
Roughly 26% of Gen Z adults and 52% of millennials own their home, compared to 71% of Gen Xers and 79% of baby boomers.
Separately, several class-action lawsuits working their way through the system could upend how people purchase homes, as the practice of the home seller paying the commission for the buyers’ agent comes under scrutiny.