• ResiClub
  • Posts
  • 80% of millennials have a mortgage rate under 5%—only 52% of Gen Z borrowers can say the same

80% of millennials have a mortgage rate under 5%—only 52% of Gen Z borrowers can say the same

Freddie Mac economists believe these low mortgage rates have created a “lock-in effect” on the resale market. They think it will loosen first among millennials.

Today's newsletter is brought to you by Groundfloor!

Groundfloor powers fractional real estate investing for new and experienced investors. We've seen 10% annualized returns across our portfolio, and our award-winning platform allows you to see returns in just days (not years), with no fees. Join hundreds of thousands of others who have already invested over $1.3 billion in real estate debt through Groundfloor.

Groundfloor is open to accredited and non-accredited investors and qualifies all its opportunities through the S.E.C. offering more transparency than other platforms. With our Auto Investor account, you'll be automatically invested and diversified across dozens (even hundreds!) of projects immediately. Download the app or visit Groundfloor to set up an account today.

According to a new Freddie Mac analysis, this is the share of current mortgage borrowers with an interest rate at or below 5.00%:

77% - Silent Gen (born 1928-1945)

79% - Baby boomers (born 1946-1964)

80% - Gen X (born 1965-1980)

80% - Millennials (born 1981-1996)

52% - Gen Z (born 1997-2012)

Freddie Mac economists believe these low mortgage rates have created a “lock-in effect” on the resale market. They think it will ease first among millennials.

The reason? Life happens regardless of rates, and soon, some millennials will be turning their focus to space and school districts. (That psychological aspect is why ResiClub attributes the lock-in effect to high “switching costs”, which can be both financial and psychological).

“Due to the ongoing rate lock effect, the housing market is currently plagued by a lean inventory of existing homes for sale. While homeowners moving to another home does not add to the net supply of homes for sale, churn is essential for keeping people moving along through their life stages. An individual’s demand for housing keeps evolving as young families move into starter homes and then transition up into larger homes as their families grow. Gen Xers are generally several years away from retirement and have already transitioned from their starter homes to accommodate their growing family; therefore, they are less likely to move from their current homes. The added benefit of low rates may mean that they will remain rate-locked for longer. Millennials, on the other hand—particularly the younger Millennials—are more prone to changing jobs and transitioning into bigger homes as families grow, making them more likely to move regardless of their current low rates. According to the American Community Survey, in 2022, when the average mortgage rate was 5.3%, 12% of Millennial homeowners still moved to a new place, while only 3.8% of Baby Boomers and 5.5% of Gen Xers moved. This suggests that while Baby Boomers and Gen Xers will likely stay put and retain their low mortgage rates, Millennials will likely unlock their locked rate and transition up.”

wrote Freddie Mac economists in May 2024

The longer mortgage rates remain elevated, the more mortgages will be originated with a 7-handle.

As that 7-handle pool grows, Freddie Mac believes the potential pool of borrowers who would be interested in refinancing (if interest rates come down) also grows.

“As mortgage rates stay higher for longer, refinance activity continues to be challenging. Looking at the average interest rate by generation, Gen Z is at the forefront regarding refinance potential with 13% of Gen Z having rates above 7%. However, Gen Z is a fraction of total mortgage borrowers, and the number of borrowers with a rate over 7% is slim among Gen Zers. The rate dispersion suggests that there is refinance potential among other generations, notably Gen Xers and Millennials. Millennials are the largest population cohort, and therefore, despite the low homeownership rate compared to Baby Boomers and Gen Xers, the sheer number of Millennial borrowers with rates >7% is high. But the refinance potential is mainly concentrated among Gen Xers, with almost 700,000 Gen X borrowers holding mortgage rates >7%. All generations combined, over two million mortgage borrowers have rates above 7%, with over 1.2 million borrowers from the Millennial and Gen X cohorts. If rates fall below 6.5%, an additional 1.4 million borrowers, i.e., a total of over 3.4 million, will have rates above 6.5%, primarily concentrated within the Gen X generation. These borrowers are more likely to refinance their mortgage [if rates fall].”

wrote Freddie Mac economists in May 2024

Interested in advertising with ResiClub? Email [email protected]