Gen Z borrowers accounted for 13.2% of all mortgage originations in third quarter of 2023, up from 9.6% in the same period the year prior, according to the Transunion’s Credit Industry Insights report released on Thursday. While millennials remain the largest cohort obtaining mortgages, Gen Zers are aging into traditional homebuying ages. All the generations except for Gen Zers saw their share of the market decline in the quarterly report.

Overall originations, however, continued a decline from the heady days of the COVID-19 pandemic. Transunion reports that only 1.2 million mortgages, both purchases and refinances, were originated in Q3 2023. That’s a 22% decline from the 1.5 million mortgages originated in the same quarter 2022.

“Persistently high mortgage rates remain a significant headwind in the mortgage market, particularly affecting demand for refinance,” said Satyan Merchant, a Transunion senior vice president, in a press release. “Purchase originations will continue to drive the mortgage market over the next several quarters, as demand for refinance will depend on mortgage rates falling significantly below current high levels.”

The good news is Q3 2023 saw the smallest year-over-year decline in the past seven quarters, indicating the mortgage origination market may be near its bottom. And Q3 2023 numbers nearly mirrored the second quarter of 2023 numbers, both just about 1.2 million originations.

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 “Millennials and Gen Zers don’t need to navigate the complex waters of real estate investing alone.”

Not all hope is lost. With real estate investment strategies and the guidance of previous generations, millennials and Gen Zers can find alternative avenues to homeownership. Mortgage originators can help these younger borrowers find their path forward.

Unique challenges

Today’s housing market is vastly different from that of only 20 or 30 years ago. Millennials (those born between 1981 and 1996) and Gen Zers (born between 1997 and 2012) face unique challenges in accessing the property ladder.

While the cost of living continues to increase, wage growth hasn’t kept pace. From 2009 to 2021, median wage growth in the U.S. never topped 4% year over year and often was below 3%, according to Federal Reserve data. Wage growth surged during the COVID-19 pandemic, but years of stagnant wages took a toll. This disparity resulted in younger generations having less purchasing power than their parents at the same age.

Meanwhile, the burden of student loans, which many millennials and Gen Zers took on in pursuit of higher education, drains a significant portion of their income and limits their ability to save for a downpayment. Millennials account for almost half (47%) of the nation’s outstanding student loan debt and have an average outstanding balance of more than $42,600, according to TransUnion. Gen Zers hold an average outstanding loan balance of nearly $24,500.

Housing prices, especially in major urban areas, have seen exponential growth recently. A lack of housing supply, coupled with high demand and elevated interest rates, has resulted in home prices that are often beyond the reach of the average millennial or Gen Zer. But amid these challenges, there’s an avenue that presents a viable solution — real estate investing.

Investment strategies

While traditional homeownership may be challenging, real estate investing offers younger generations a way to build wealth and eventually own a home. One of the first ways to do this is for younger renters to consider purchasing a rental property.

By purchasing a property specifically for rental purposes, millennials and Gen Zers can generate passive income. How is this an option? If a younger borrower makes a decent salary in a high-cost city such as Boston, New York or San Francisco, they could purchase a rental home in a less expensive area nearby. The rental income could cover most if not all of the mortgage. Over time, this rental income can be used to pay down the mortgage, and the property can appreciate in value, building valuable equity for the owner to eventually cash in.

Another strategy is called house hacking. This involves living in one unit of a multiunit property while renting out the others. This could be a duplex, triplex or fourplex with long-term rentals, or even a multifamily property (five or more units) where the borrower relies on short-term rental platforms such as Airbnb, Vrbo or Golightly (an invitation-only, short-term rental app exclusively for women). This allows the owner to live for free or at a reduced cost, all while gaining equity in their property.

Millennials and Gen Zers also can team up with partners, either peers or seasoned investors, to co-invest. By pooling resources, they can enter the market sooner while sharing the risks and rewards. Real estate investment trusts (REITs), which offer a way to indirectly invest in property without taking out a mortgage or placing one’s name on the title, are another option. People can invest in commercial or residential REITs. They provide an opportunity to benefit from the real estate market while using less capital.

Crucial support

Millennials and Gen Zers don’t need to navigate the complex waters of real estate investing alone. Their parents, many of whom benefited from a more forgiving housing market, can play a crucial role in guiding and supporting them.

Parents can encourage and support their children in obtaining real estate education. Workshops, courses, books and seminars can provide the knowledge needed to make informed decisions. If financially feasible, parents might consider gifting or lending a portion of a downpayment to help their children enter the market sooner.

“Economic pressures, student debt and skyrocketing home prices have combined to create an environment where a significant portion of these generations struggles to enter the market.”

For younger consumers struggling with credit or income verification, parents can act as co-signers to help them qualify for a mortgage. Co-signers can be family members or friends, but these are legally binding contracts, meaning that the lender can come after a co-signer if the primary borrower defaults on the mortgage.

Co-signers are different from co-borrowers. A co-borrower’s name will appear on the property title, but a co-signer’s name will not. There are drawbacks to co-signing that should be considered carefully, but this could be a viable first step for younger borrowers to achieve homeownership.

Alternatively, parents can invest alongside their children, bringing both experience and capital to the table. In doing so, parents not only help their children access the benefits of real estate but also pass on the invaluable lessons of wealth building and financial independence.

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The challenges that millennials and Gen Zers face in achieving homeownership cannot be underestimated. Yet with the power of real estate investing and the supportive hand of the previous generation, there are viable pathways to navigate this challenging terrain. Mortgage originators would do well to offer this advice to younger generations.

By embracing alternative strategies, seeking knowledge and collaborating, younger borrowers can achieve the dream of owning a home. It might look different than the traditional route, but the destination remains the same: a place to call one’s own and a foundation for future wealth. ●

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