Young Buyers are Tackling Rising Property Prices With 'House Hacking,' Here's What That Means
As the housing market continues to pose challenges with soaring prices and interest rates, Gen Z and millennials are embracing a unique approach to homeownership. "House hacking," which involves renting out a portion or the entirety of one's home to generate additional income, makes the property more affordable for buyers. According to a recent report by Zillow, nearly 4 in 10 recent homebuyers see house hacking as a crucial opportunity, marking an eight-percentage-point increase over the past two years.
The Appeal for younger generations
Millennials and Gen Z are at the forefront of embracing the house hacking trend as per a Zillow survey, conducted between April and July 2023 with over 6,500 recent homebuyers. The prospect of generating additional income through this method is seen as a tangible way to turn homeownership dreams into reality in a market characterized by soaring costs.
Affordability challenges in the housing market
The median sale price for homes in the U.S. reached $413,874 in October, reflecting a 3.5% increase from the previous year. The average rate for 30-year mortgages hit 8%, which is the highest in 23 years, making affordability a significant concern for potential homebuyers. Redfin's report highlights the need for a salary of $114,627 to afford a median-priced house in the U.S., emphasizing the financial challenges faced by those entering the housing market.
Addressing the lack of starter homes
The scarcity of small starter homes compounds the difficulties faced by millennials and Gen Z buyers. The limited availability of affordable options often forces younger buyers to consider more expensive homes than initially planned. House hacking, with its potential to generate additional income, becomes an attractive option to offset the higher costs associated with homeownership.
The temporary nature of house hacking opportunities
While house hacking presents an immediate solution, the opportunity may be short-lived. In some markets, new apartment buildings are under construction, with available units expected in the coming year, especially smaller one-bedroom options. Rental market inflation has cooled due to increased inventory, pushing the rental vacancy rate up to 6.6% in the third quarter. Despite this, Zillow's Manny Garcia warns of a "massive shortage of housing, especially affordable housing options," indicating that competitively priced homes can still find reliable renters.
Considerations before 'House Hacking'
Before jumping into house hacking, potential buyers must carefully consider various factors. Firstly, despite the additional income from renting out part of the property, buyers still need a sufficient down payment and proof of income to qualify for financing. A mortgage banker emphasizes that banks won't consider potential rental income when assessing mortgage eligibility. Buyers must prove they can afford the mortgage without relying on rental income.
Mitigating risks and doing homework
Buyers opting for house hacking should be cautious of potential risks, such as getting stuck with an expensive mortgage and unrented space. Research and due diligence are essential, including understanding the local rental market rates and consulting with rental managers to draft leases and estimate the going rates in the area. Awareness of local ordinances on renting and homeowners association regulations is also crucial to avoid legal complications.