The home search began auspiciously.
A year ago, Lindsay and Michael Hyland began the hunt for a home in the St. Petersburg, Florida area, where they met and worked as a physical therapist and a financial planner. What they experienced was pure frustration.
"People are coming in with all cash offers," Lindsay Hyland said. "That makes it extremely hard to compete with."
Fast forward to 2023 and the couple moved to New Jersey to live with family while they search for a home. Except the interest rate increased significantly since last year, from around 5.7% in June of 2022 to 7.5% this June on a 30-year mortgage. That's about a $600 a month increase on their $500,000 home purchase budget with the monthly payment at $3,496 versus $2,902.
Intent on living within their means, the couple put in an offer on a two-bedroom townhome in Morris Township, New Jersey.
"You want a place where you don't want to feel you're under water," said Lindsay Hyland, 28, who is expecting the couple's first child in October.
As interest rates rise with no end in sight for the low inventory issues, Gen Z and millennial buyers are making adjustments. According to a Bankratesurvey this spring, the majority of Gen Z and millennial buyers at 82% between the ages of 18 and 42 are willing to make sacrifices to find affordable housing.
SEE MORE: Homebuyers taking a pause with high interest rates, low inventory
To become homeowners, the young people said they'd do anything from buying a fixer upper, moving out of state or taking in roommates.
According to the Realtor.com 2023 housing forecast, home buying costs are not coming down any time soon this year.
The average 30-year mortgage rate is expected to be in the 7.4% range. Buying power is on the decline with the typical mortgage payment expected to rise 28% to an average of $2,430. That's roughly double the payment in 2021, according to the real estate website.
"It's tough for young buyers," said Max Stokes, an agent at Compass Real Estate in Bergen County, New Jersey, a suburb of New York City.
The first-time buyers are finding that the budget they had just isn't cutting it any more. Home prices are not coming down even as interest rates rise. Homeowners who locked in mortgage rates during the lows of 2021 at 3% and less are not selling their homes if it means committing to a 7% mortgage rate for a new home. Older Americans are also living longer, opting to stay in their homes instead of downsizing.
The inventory issue may take a while to correct as the American system of a 30-year mortgage is much longer than other western nations with shorter-term loans or adjustable-rate mortgages, said Kent Gardner, retired chief economist at Center for Governmental Research. Those who have locked in at 2.5% interest rates three to four years ago have little incentive to give that up, Gardner said.
Gen Z and millennials who don't own a home still have aspirations of purchasing one. According to Bankrate.com, about two-thirds at 66% surveyed consider owning one a feature of the American Dream. Just 6% of Gen Z and 8% of millennials say they never want to own a home, compared to 19% of Gen X and 17% of baby boomers.
With mortgage rates doubling in a period of less than two years, many buyers were caught off guard. This exacerbated the housing cost crisis.
According to real estate website Redfin, the median home sale price was $377,750 in June, down 1.9% from a year earlier. But the monthly mortgage payment on the median-asking-price home hit a record high of $2,651 at a 6.79% mortgage rate in June. That's up 15%, or $348, from a year earlier.
Lindsay and Michael Hyland certainly made personal sacrifices to buy their townhome. They lived with Michael Hyland's parents to save for a down payment. All of their free time for more than a year between Florida and New Jersey was dedicated to the house hunt. There were many disappointing moments when they were outbid.
"People were bidding $60,000 to $70,000 over asking," Lindsay Hyland said. "We can't afford that."
The Hylands are eager to start their lives in their townhome, even though a two bedroom is tight for a growing family with a baby on the way. But they would rather live within their budget than buy something they cannot afford.
For other first-time buyers currently in the market, Lindsay Hyland said she feels their pain. Her advice: "Be patient. Don't feel like you need to jump in and buy something."
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