The job market is at what economists consider full employment, home prices keep rising, and wages are showing signs of growth. Good news for real estate, right?
If you’re a millennial hoping to buy your first home, maybe not. Supply and demand are huge factors in the housing market, and right now there’s an imbalance tipping the scales in seller’s favor: As inventory keeps tightening, the rosy economy and demographic trends are driving increased demand.
Specifically, millennials are collectively “aging into homeownership” as a result of reaching the same life stages as previous generations (marriage, childbearing) — just at a delayed pace, according to Zillow Group Senior Economist Skylar Olsen, one of a team of economists and researchers at Zillow Group that put together the company’s second-annual Consumer Housing Trends Report, released today.
Moreover, home prices are rising about 7 percent year over year — an “unsustainable” rate when “normal” increases hover between 3 and 5 percent, she said.
Competitive markets often mean lowering expectations, busting budgets, searching for alternative inventory sources, considering renting rather than buying, being ready to make decisions quickly, and seeking help from others — including real estate agents, according to Olsen.
The report, which the company says is the largest-ever survey of U.S. homebuyers, sellers, owners and renters, found that millennials who face this housing market rat race are the “most frustrated” generation among homebuyers and sellers.
“Almost half of millennial buyers say they have trouble finding a home in their price range, and almost half of millennial sellers have a hard time selling their homes at the price and in the time frame they would like,” the report said. “Many are selling a home for the first time and experiencing the same pressures that other first-time sellers do, including trying to buy and sell homes simultaneously.”
The report offers a comprehensive portrait of today’s homebuyer:
- Median age: 40 years old, compared to a median age of 34 for first-time homebuyers
- 42 percent of buyers are purchasing their first home and millennials make up 71 percent of those first-timers
- The millennial generation (aged 18 to 37) makes up the largest segment of homebuyers today, comprising 42 percent of all buyers who purchased a home in the last year
- 70 percent of homebuyers are married or living with a partner
- 45 percent of homebuyers are college-educated
- Homebuyers earn a median annual household income of $87,500
- Caucasian/white adults account for 67 percent of U.S. households overall, but make up 73 percent of homebuyers
- 32 percent of first-time buyers are non-white
- The typical buyer spends an average of just over four months on the home search, while millennials average 3.9 months
- 81 percent of buyers shop with someone else, usually a spouse or partner
- 52 percent of buyers consider new construction homes
- 36 percent of buyers consider a foreclosure, 34 percent consider a short-sale home, 22 percent consider buying a home at auction, and 27 percent consider buying land with no existing home on-site
“As buyers attempt to balance their desires against their budget, some look outside traditional for-sale homes and consider distressed or non-traditional home purchases as another option,” the report said.
How the hot market is changing homebuying
When today’s buyers consider their dream homes, visions of white picket fences and spacious kitchens have to take a back seat to a more prosaic consideration: What can they afford?
Looking back on the home they purchase in the past year, buyers’ said their no. 1 requirement was finding a home within their initial price range.
While most homebuyers (58 percent) managed to stay within budget and 13 percent spent less than they thought they would, nearly 1 in 3 (29 percent) spent more than they originally intended, the report said. That figure rises to 37 percent for millennials.
Urban buyers were much more likely to go over budget (42 percent) than suburban (25 percent) or rural (20 percent) buyers, the report said.
“Some of the major markets in the West and Northeast are very competitive, and buyers are faced with limited inventory, occasional bidding wars, and generally more expensive homes,” the report said. “As a result, the West and Northeast are regions where buyers are most likely to spend more than initially budgeted (40 percent and 34 percent, respectively).”
The survey did not ask whether buyers going over budget made particular sacrifices to do so.
Scraping together a down payment, one way or another
About two in five millennials (39 percent) put down 20 percent or more on their home purchase, while about one in five (21 percent) put down 5 percent or less.
Just over half of homebuyers (53 percent) saved up for their down payment over time and 20 percent got a gift or loan from family or friends. Millennials were even more likely to turn to the Bank of Mom and Dad: 29 percent got a loan or gift from family or friends.
About a quarter (24 percent) of buyers combined two or more sources to come up with the down payment. This was especially true for buyers who reported difficulties finding a home within their price range and/or within their time frame. Just under a third of millennial buyers (31 percent) used more than one source for their down payment.
Larger down payments give buyers an edge, according to Olsen. First-time homebuyers who put down 3 to 5 percent ended up having to make 12 percent more offers on homes than those who put down 20 percent or more, she said.
Just over half of millennial buyers (53 percent) make multiple offers to buy their first home, the company said.
Buyers are cognizant that they have to have their options open in such a cutthroat market, according to Olsen. Nearly half of all buyers (45 percent) consider renting during the process of buying their home. That figure rises to 57 percent for first-time buyers and 62 percent for millennial buyers.
“In many cities across the U.S., the housing market is extremely competitive, especially for first-time buyers who are looking to purchase a starter home,” said Svenja Gudell, Zillow Group’s chief economist, in a statement. “Young buyers often start their careers in fast-growing cities in which the market is particularly tough — and they’re trying to save for a down payment while making record-high rent payments.”
Gudell noted that scrappy young buyers working against the odds are willing to “try every trick in the book to find a place to call home.” They’ll consider rentals as their backup plan, look at homes outside their ideal neighborhood, and get creative with the down payment — whatever it takes.
Bad news for homebuyers
At least in the near term, the inventory crisis is unlikely to be eased much by existing-home sellers. The vast majority of homeowners (86 percent) have no plans to move in the next three years, according to the report.
The top two reasons homeowners plan to stay in their homes are love of their current home (58 percent) and neighborhood (48 percent).
A fifth of homeowners who don’t plan to sell say they can’t afford to sell and move elsewhere, while another 14 percent say they’re waiting for the value of their home to rise before they would consider moving.
What can agents do for homebuyers?
The vast majority of homebuyers use online tools as a complement to their partnership with an agent, according to the report.
Nearly four in five buyers (79 percent) shop online and nearly three-quarters (74 percent) work with an agent. Those who work with agents are more likely to be satisfied with the homebuying process than those who shop on their own (74 percent satisfied vs. 67 percent satisfied, respectively).
Despite a plethora of online resources allowing buyers to purchase sight-unseen, buyers still want to see homes in person to help them decide if a home is right for them, according to the report.
That doesn’t mean they don’t value visuals, though — especially millennials. More than half of millennials (58 percent) cite professional pictures as important and 45 percent cite a live virtual tour as important.
In contrast to what some agents might think, most buyers don’t consider home staging to be important (only 28 percent did). Millennials were the exception: 41 percent said home staging was important to helping them decide whether to buy a home.
The agent-provided services buyers valued most were:
- Guiding me through overall buying process (82 percent)
- Leading contract negotiations (82 percent)
- Taking me on private home tours (82 percent)
- Helping me decide details of my offer(s) (81 percent)
- Providing legal advice (76 percent)
- Referring me to a mortgage lender (75 percent)
- Referring me to an inspector (75 percent)
“Imagine the competitive buying market, how stressful that may be, you still need a buddy there,” Olsen said.
“It may be less helping me decide what home I want than it used to be, possibly because of online resources, but now more and more it’s, ‘Look, this is still a really stressful process. I need help negotiating and I need help getting first access to homes … [and] helping decide the details of my offer where I come up to the top.
“The agent is going to be the expert here, in terms of what is the benefit to win out in terms of negotiating, having that greater experience in terms of winning that home. Being the boots on the ground who works in this market day after day.”
She advised that homebuyers wishing to compete arm themselves with as much information as possible and get ready to act fast.
“Knowing your initial budget, knowing how far you can go, being willing to move quickly are big. I know agents have their own special tricks and techniques, from making it personal to all sorts of other things that we don’t have too much data on,” Olsen said.
Of buyers who used an agent, 53 percent reached out to only one agent, while 26 percent contacted two agents and 21 percent contacted three or more agents. The likelihood of contacting more than one agent rose with age: 54 percent of millennials considered multiple agents.
Just under a quarter of homebuyers (23 percent) found their agent through a referral from a friend or relative, followed by 19 percent who found their agent through a real estate website or app.
When it comes to how buyers choose an agent, first impressions of an agent’s trustworthiness and responsiveness were most important, followed by local market knowledge, reputation in the community, sales history, and personal referrals.
When homebuyers reach out to their agent, 81 percent expect a response within a day or less, 30 percent expect a response within a few hours, and 13 percent expect one in less than an hour, the report said.
Among those who reported using online resources in their buying process, 45 percent expected a response within a few hours or less, compared with 35 percent who do not use online resources.
It seems agents are listening. An average of 88 percent of buyers indicated the agent or agents they contact respond in a timely manner, the report said.
More buyers prefer non-digital communication with their agent, such as the phone (30 percent) or meeting in person (26 percent). This holds true for millennials as well: 29 percent prefer phone calls and 16 percent prefer meeting in person over texting, emails or virtual interaction.
About the survey
More than 13,000 U.S. residents age 18 to 75 responded to an online survey from independent market research firm Lieberman Research Worldwide between May 17 and June 5, 2017.
Respondents break down to 2,965 buyers, 2,290 sellers, 3,040 homeowners, 3,047 renters and 1,153 long-term renters.
The survey was “blinded,” meaning the respondents did not know Zillow Group was its sponsor. Because of a different sampling methodology in this survey, the results of this year’s survey should not be compared to the results of last year’s survey, according to Olsen.