Gen Z makes noticeable inroads in early-year home buying

Aspiring young homeowners are managing to find their way to the purchase table this year, leading to a spike in government-backed lending.  

The growth in the share of first-time home buyers shows some are taking advantage of a slow thaw in challenging affordability levels and rising inventory, picking up the borrowing slack from "locked in" current owners. Activity varied greatly by market, though, ICE Mortgage Technology noted. At the same time, a jump in delinquency rates within the set of borrowers is also an emerging concern. 

"Younger home buyers are picking up market share with lenders this spring," said Andy Walden, ICE's head of mortgage and housing market research in a press release.

"While first-time homebuyers continue to face affordability headwinds, they don't have the same disincentive to transact as many repeat buyers, who remain locked in the golden handcuffs of relatively low monthly payments on their existing homes," Walden said. 

First-time buyers comprised 58% of all purchase lending in the first quarter this year, the highest share on record, according to ICE's May Mortgage Monitor report. Among that group, members of Generation Z accounted for approximately one in four mortgage originations and 15% of purchase loans overall. 

Gen Z homeownership picked up particularly in the Central U.S., where the group garnered more than 20% of all purchases in both North Dakota and South Dakota, Indiana, Louisiana and Kentucky. 

California came in at the bottom in Gen Z purchase transactions with just 13% of first-time buyers and 8% overall. 

Millennials had the largest share of first-time purchases at 53% and an overall percentage of 48%. Generation X, meanwhile, made up 17% of the new homeowner cohort, and 27% of all purchase transactions.

Purchase lending was still down overall in 2024 compared to the two-year period prior to the Covid-19 pandemic by approximately 25%, ICE said. However, the 19% contraction among first-time buyers came in less pronounced than it did for repeat homeowners at 31%.

The pendulum swings back toward FHA loans

The housing boom and heated competition for limited inventory earlier this decade drove a shift in the types of mortgages preferred by new homeowners. While Federal Housing Administration-guaranteed mortgages have historically appealed to many first-time buyers, close to 60% opted instead for conventional loans backed by Fannie Mae and Freddie Mac in the peak sales year of 2022 due to their perceived favorability among sellers.  

While the conventional market still accounted for almost half of such originations in the first quarter, the pendulum swung back toward FHA loans, which nabbed a 35% share of all first-time buyer mortgages, the biggest slice since 2017, ICE said.  

But rising housing costs have also led to elevated debt-to-income ratios among new property  owners, particularly those belonging to Generation X, ICE reported. DTIs among first-time Gen X buyers came in as high as 41.5% compared to younger cohorts, who kept their ratio closer to 40%.

The average down payment in March for a first-time purchase came in at $49,000, compared to the mean for repeat buyers of $134,000. The difference was especially stark in the FHA market, where loans often require smaller upfront amounts and buyers may be able to take advantage of down payment grant programs.

Among first-time buyers, FHA borrowers put down an average of $16,000, while those who went for a conventional loan typically had a mean of $77,000. 

The growth in the first-time buyer transaction rate comes as the housing market sees listings rising and prices further moderating. Early reports of April housing costs show prices rising by 1.9% annually, the slowest rate in almost two years.

While sluggish sales volumes contributed to increased inventory levels, new listings also are higher, increasing 10% in March, ICE said. At the recent rate of growth, inventory levels are poised to return to pre-pandemic levels on a national basis in mid-to-late 2026, but some markets in the West have seen supply already exceed those numbers.  

FHA performance shows weakness

At the same time their share of purchases increased, first-time home buyers also had a higher rate of defaults, ICE performance trends showed. 

A worrying sign for the FHA market is the recent surge in distressed mortgages. Loans backed by the office now account for nearly half of all serious delinquencies of 90 days or more, the highest rate since the data provider began tracking the metric at the turn of the century. 

"Mortgage delinquency rates remain near historic lows but are trending higher year over year, propelled almost entirely by FHA loans, with Southern states leading 90-plus-day delinquency rates," the report said. The South leads the country after enduring a particularly destructive 2024 hurricane season. 

With Covid-related loss-mitigation workouts and other modifications set to end this year, "it will be worth watching to see how many of those loans roll from 90-plus days delinquent into foreclosure."  

The annual rate of serious delinquencies have risen across the housing market for each of the past eight months, ICE said.

The growing economic influence of Gen Z and other young consumers as they reach home buying age means their mortgage performance is worth examining now for clues into broader market trends, Walden said. 

"Capital markets participants should closely monitor how this shift may influence loan performance and portfolio behavior as these buyers gain a stronger foothold in the housing market," he said.