Millennials Are Dominating the Housing Market With Mortgage Rates Near All-Time Lows

Buying homes and building wealth -- millennials and Gen Z are driving the housing market.

Millennials are the strongest buying force in the housing market. They're the largest cohort of home buyers, capitalizing on the advantageous combination of income stability and low mortgage rates. That's something that Better.com knows well.

"Millennials have made up over half of all Better's purchase applications per month" in the first quarter of 2021, says Emanuel Santa-Donato, VP, Capital Markets & Lead Acquisition at Better.

America's largest generation got a late start buying homes

Millennials are now the biggest generation in the U.S. The youngest are currently 25 years old. That's a little young for some to buy a home -- but definitely in the right age range.

Part of the reason millennials are such strong contenders in today's market is that as a group they delayed buying homes. Many of them came of home-buying age during the Great Recession. Millennials saw millions of homeowners stand helplessly by as their home values plummeted to below (sometimes far below) their mortgage balances. It was only natural that millennials wanted to wait for the housing market chaos to calm before taking the plunge on what's usually the largest purchase of a person's life.

This delay means that many millennials were more advanced in their careers before they bought a home. They had more time to increase their earnings and more time to save toward a down payment, both factors that can make you a stronger mortgage applicant.

Gen Z is now ready to buy homes

Younger buyers waited out the housing market crash, so the median age to buy a home is now somewhere in the 40s. But that doesn't mean Generation Z is out of the picture. According to a 2020 report from the Consumer Financial Protection Bureau, the median age for first-time home buyers is 32, and half of all first-timers are younger. The oldest members of Gen Z are 24 or 25 right now -- and they're starting to look for ways to build wealth.

"We have seen an interesting increase in Gen Z (the youngest generation aged 25 and below) customers taking advantage of historically low interest rates and purchasing homes across the country," says Santa-Donato. "The number of Gen Z applications at Better increased 57% from January to March, and was up 124% year-over-year from March 2020."

Mortgage rates remain at historic lows

You might be tired of hearing that mortgage interest rates are historically low. You might even be skeptical of the "historic" part, especially if you're young enough that mortgage rates have been low the entire time you've been looking at the housing market. But in your parents' lifetime, a 14% interest rate on a mortgage was a real thing.

Interest rate has a huge effect on affordability. If you can afford a $1,000 loan payment, you can borrow around $240,000 at 3% -- but just $85,000 at 14%.

That's an extreme example, but consider that since ancient times, interest rates between 6% and 12% have been the norm. At 8%, your $1,000 payment would get you a $140,000 loan right now. When we talk about today's low rates, make no mistake about it, we are really talking about how much home you can buy.

Rates are guaranteed to fluctuate. Once they go up, it might be a long time before they come back down to what they are today. At the time of this writing, the interest rate on an average 30-year fixed rate mortgage is around 3%.

Homeownership builds wealth

Buying a home can help you build wealth. The Urban Institute, a think tank that studies economic policy, says that most families benefit economically by buying a home. Owning is more financially advantageous than renting for the majority of U.S. households. Homeownership is an especially effective financial tool for lower income households.

Millennials and Gen Z are getting competitively priced loans from lenders like Better Mortgage. According to Santa-Donato, Better funded $25 billion in loans in 2020 and $14 billion in the first quarter of 2021 alone.

The earlier you start your home-buying journey, the more equity you can build and the greater the likelihood that you can upgrade to a more valuable home. Millennials are now building equity and Gen Z understands that an early start can be to their advantage.