The housing market is about to get a lot more expensive for millennials and Gen Z
- Student loan payments are set to resume in October, and that will weigh further on home affordability.
- Gen Z and millennials looking to buy a home will be squeezed particularly hard.
The housing market is already historically unaffordable, but for Gen Z and millennial Americans it's about to get even more difficult to navigate once student loan payments resume in October.
Millions of student loan borrowers have enjoyed the pause in payments since March 2020, but the end of that moratorium will deliver a "major financial shock" to young adults, according to Moody's Analytics.
Individuals born from 1979 through 1998 in particular will have to balance resumed payments with increased costs of living and inflation.
A recent American Community Survey found that one out of three Americans is now between 20 and 44 years old, and this cohort carries the largest share of student loans — and will likely have to sacrifice some quality of life come next month.
In July, Moody's economists led by Thomas P LaSalvia and Nick Villa forecasted that as many as 5 million student loan borrowers will need to resume payments close to $275 per month on average. That amounts to about 0.25% of GDP.
And, on average, a median-income household spends about 30% on renting an apartment, and that additional monthly debt payment will cut into that.
Here's what Moody's concluded:
"Under the assumption that total household income does not change by the end of student loan moratorium and the percentage of total income needed to pay rent also stays the same, the monthly reductions from resuming student loan payments will slash any financial buffers, forcing households to cut back on discretionary spending or face difficult housing decisions such as trading down from Class A to Class B/C rental units, or even having to share a unit with family or friends to avoid homelessness."
As things stand, mortgage rates are hovering near two-decade highs and housing inventory is extremely tight. That's created a lock-in effect — current homeowners don't want to move because they secured lower interest rates previously, and that's keeping homes off the market and reducing options for house hunters.
Not only that, but starter homes that are traditionally affordable have become more expensive than ever.
In 2023, the income needed to purchase a typical starter home — which is what many millennials and Gen Z buyers do — increased 13% compared to last year, to $64,500.
All told, student loan payments are just the latest variable that's keeping would-be buyers sidelined from the housing market.