Young homebuyers are taking the adage "marry the house, date the rate" to heart, but that could set them up for potential problems in the future, a new report warns.
Nearly two-thirds of millennial and Gen Z homebuyers said it was "important" or "extremely important" that they be able to refinance their homes in the next three years, according to a new survey from Truework, an income and employment verification website. That compares to 56% of all homebuyers and is double the number of baby boomers who said they would need to do so.
Millennials and Gen Z homeowners appear to have a higher risk tolerance, often accepting less-than-ideal mortgage rates with the intention of refinancing later.
This could be a risky decision, though, said the report's authors. For one, the market is unpredictable, and there's no guarantee that rates will go down significantly or that other costs won't go up. For another, homeowner finances change. Borrowers may lose their job, see their pay cut, or run into credit problems between the first loan and the refinancing.
"When I consult clients about a refinance, I always tell them, 'know the numbers,'" said Todd Carson, director of sales performance at Planet Home Lending. "A 1% rate reduction may serve as a broad benchmark, but in practice, every homeowner's financial picture is unique."
Many homebuyers are also blindsided by unexpected costs, the survey found. Nearly a quarter of respondents said they were surprised by the extent of the "other costs in the process," such as inspections and closing costs. These struggles continued even after they left the closing table, with 17% saying that their biggest financial difficulty was paying for "unexpected repairs." This issue was most pronounced for Gen Z and millennial buyers.
Besides closing costs and repairs, rising insurance rates are also weighing on household budgets, with the average homeowner's insurance premium
The Truework report pointed to "industry-wide communication failures" in helping first-time homeowners, especially younger ones, understand the true costs and risks that come with buying a home. They raised a red flag regarding the increasing tendency for younger buyers to rely heavily on refinancing. The authors warned this could create "systemic vulnerabilities" that could have broader economic implications.
Hope for new homebuyers
While fears around affordability weigh heavily on the minds of younger homebuyers, new data from the National Association of Realtors offers some hope.
While home prices rose in 75% of markets nationwide in the second quarter of this year, this is down from the first quarter, when prices rose in 83% of markets, according to the NAR's Housing Affordability Index. The median price of a single-family home moved up 1.7% year-over-year, a slowdown from last quarter when prices increased 3.4%.
There were huge regional variations in this, though. In the Northeast, prices were up more than 6%, triple the nationwide average. The West, meanwhile, saw only a slight bump of 0.6%, and in the South, prices remained flat. This tracks with other recent reports which found that
"Home prices have been rising faster in the Midwest, due to affordability, and the Northeast, due to limited inventory," said NAR chief economist Lawrence Yun in a statement. "The South region – especially Florida and Texas – is experiencing a price correction due to the increase in new home construction in recent years."
Data also shows that first-time buyers are paying 6% less in mortgage payments than they were a year ago for a starter home, and many are also spending a smaller percentage of their income on their mortgage.
