House Hacking: Gen Z and Millennials’ Path to Homeownership in a Tough Market
Younger generations, facing soaring housing prices and surging interest rates, are finding innovative ways to navigate the challenging market conditions.
The concept of “house hacking” has gained traction, involving the practice of renting out parts or the entirety of one’s property to secure an additional income stream.
A recent report by Zillow revealed that nearly 39% of recent homebuyers perceive house hacking as a significant opportunity. This figure has surged by eight percentage points over the past couple of years.
The enthusiasm for house hacking is notably high among younger demographics. More than half of millennial (55%) and Gen Z (51%) homebuyers showcased positive sentiments toward this approach, according to Zillow’s survey of over 6,500 recent homebuyers between April and July 2023.
Manny Garcia, senior population scientist at Zillow, highlighted that the additional income from house hacking could help turn homeownership aspirations into reality, especially amidst the existing affordability constraints in the current market.
Recent reports depict a challenging scenario: the median sale price for a U.S. house stands at $413,874, marking a 3.5% increase from a year earlier. Simultaneously, 30-year mortgage rates soared to an unprecedented 8% in October, compared to a low of under 3% in January 2021, as per Bankrate data.
To counter the escalating costs associated with homeownership, potential buyers are exploring options like house hacking. However, purchasing considerations have grown more complex. Redfin’s recent analysis indicated that a salary of $114,627 is necessary to afford a median-priced U.S. house, leveraging a median home price of $420,000 in August.
Amidst limited availability of small starter homes, aspiring millennial and Gen Z buyers might need to opt for pricier homes than originally intended, noted Daryl Fairweather, chief economist at Redfin. The scarcity of affordable smaller homes nudges buyers toward renting or sharing a space, reflecting a need for such options in the current market dynamics.
House hacking offers potential homeowners the opportunity to generate additional income, aiding in covering expenses or even offsetting mortgage costs. However, the window of opportunity for house hacking may dwindle as new apartment constructions emerge, particularly smaller one-bedroom units, impacting the rental market.
Rental market dynamics have shifted, with a surge in rental vacancies due to increased inventory, causing rental price stabilization, especially for single-occupancy rentals, according to Fairweather. This trend may pose challenges for those considering renting out a room within their property.
Despite the rise in available apartments, the U.S. continues to grapple with a substantial shortage of housing, particularly in the affordable segment, highlighted by Zillow’s Garcia.
For interested buyers eyeing rental income as a supplement, securing a substantial down payment and proving adequate income to cover monthly payments remains crucial, emphasized Melissa Cohn, mortgage banker and regional vice president of William Raveis Mortgage.
However, relying solely on potential rental income to qualify for mortgage financing may present hurdles, as banks typically don’t consider future rental earnings. Additionally, local ordinances or homeowners association regulations might impact the viability of renting out portions of a property, underscoring the importance of thorough research and adherence to local regulations before delving into house hacking endeavors.
