An emerging generation of homeowners,
The economic challenges faced by younger generations, particularly since the global financial crisis, including record-setting student debt, declining homeownership rates and limited higher-earning job opportunities, have been extensively documented. These factors directly impact an individual's ability to manage debt, including mortgages, and the proliferation of this negative sentiment is cause for concern.
However, contrary to popular belief, Gen Zs are in a stronger financial position today than previous generations were at the same age. New research from dv01 demonstrates that Gen Z's relative capability to increase homeownership rates today is higher than previously thought. Moreover, they have translated capacity into action, setting new record highs for youth homeownership over the past two years.
While millennials continue to contend with the effects of the global financial crisis on their economic health, with below historical average homeownership rates, Gen Zs are in prime position to outshine their elders. There are four key metrics which support this: declining student debt levels, record inflation-adjusted median income, increased interest in degrees with more earning power and current homeownership rates.
Gen Zs are entering the workforce with lower student debt than many assume. According to the Federal Reserve Bank of New York, student debt for households aged 18 to 29 peaked in 2018 and has since declined by 6% and in 2022 it was lower than that of households aged 40 to 49 for the first time. While part of this reduction is due to COVID-related school closures and declining enrollment rates, there are no indications that students are avoiding university altogether. While initial enrollment rates peaked in 2010, and declined by 8.5% through 2019, the majority of this can be attributed to a 60% drop in for-profit university enrollment, as reported by The National Center for Education Statistics. Meanwhile, rates of students staying in school once enrolled, at both for-profit and not for-profit schools, are virtually unchanged, demonstrating that education is still vitally important for younger generations but that they are conscious about reducing their student debt.
Education-related inflation was a major factor in the substantial increase in overall student debt from 2004 to 2013, which tripled for the 18 to 29 age group during that time. Considering the current landscape of rampant inflation, the substantial slowdown in student debt growth for Gen Zs is a noteworthy indicator that this cohort is capable of managing the higher cost of education without significantly increasing their debt. Furthering this ability to manage debt is the notable rise in inflation-adjusted median income.
As reported by the U.S. Census Bureau, over the past 10 years, across all households, median income has increased 17%. For households aged 18 to 24, this growth has reached an impressive 40.4%, bringing the ratio of Gen Z's income relative to the national average in line with the peaks of the 1960s and 70s, which was a time when people started working earlier and had supposedly higher relative salaries.
This income growth is driven, in part, by a shift in college majors towards fields with higher earning potential. According to The National Center for Education Statistics, engineering, health care, and IT fields have seen massive growth (70%, 80%, and 125% respectively) over the last decade, whereas degrees in humanities and liberal arts have fallen 10 to 30%. This shift highlights Gen Z's financial acumen and future-focused planning, which is likely a result of increased financial literacy and an understanding of the lessons learnt by millennials entering the workforce after the financial crash.
Given this backdrop, this generation is relatively more capable of increasing homeownership rates today than they were over the past several decades. Homeownership for households less than 25 years old has hit new record highs every year since 2020, above levels seen between 1980 and the early 2000s, and even eclipsing the rates seen during the peak of the global financial crisis.
Gen Z's strong standing across student debt, median income, wage prospect and current homeownership metrics position them favorably for future homeownership. The security of the MBS market depends on the strength of underlying mortgage loans, which in turn is reliant on homeowners' ability to continue paying off their mortgages on time. As Gen Zs enter the housing market, MBS investors should have confidence in their ability to make timely mortgage payments and be less likely to default on their loans.
