Gen Z might have missed out on their chance to get rich through homeownership

• Rising home values in recent years have helped many millennials boost their wealth. 
• But an investing expert says Gen Z might not be so lucky. 
• High home prices, mortgage rates, and the costs of homeownership could make it a subpar investment. 

Homeownership is helping some millennials get rich — but Gen Zers might have a hard time following in their footsteps.

About 55% of millennials owned a home as of 2023, per a Redfin analysis of Current Population Survey data. Many of them became homeowners before home prices and mortgage rates spiked in 2021 and 2022.

As buying a home reached record unaffordability levels in recent years, these millennials kept getting richer on paper due to their rising home values. According to Federal Reserve data, millennials held $3.5 trillion in real estate wealth as of the fourth quarter of 2019. In the first quarter of 2024, this more than doubled to $8.6 trillion.

Some Gen Zers managed to get in on the fun — about a quarter of Gen Zers between the ages of 19 and 26 owned a home as of 2023, per Redfin. But the majority who didn't purchase a home could have a much harder time growing their wealth through home ownership in the years to come, Dr. Roger Silk, a former treasury officer at the World Bank and author of "The Investor's Dilemma Decoded," told Business Insider via email.

He pointed to a few key reasons.

First, while mortgage rates could tick lower in the years ahead, experts don't expect the roughly 3% rates of a few years ago to return anytime soon. Additionally, a lack of housing supply is expected to continue propping up home prices.

This means that, for the foreseeable future, home affordability levels could remain far from where they were a few years ago. And these elevated costs could make it more difficult for Gen Z homeowners to get a return on their investment.

"Higher interest rates and higher home prices make it harder for a new buyer to earn a high return on owning a home," Silk said.

What's more, Silk said there's a larger reason Gen Zers shouldn't count on homeownership to boost their wealth. That's because historically, it hasn't had a great track record as an investment.

Citing US home price and inflation data between 1890 and 2023, Silk said single-family home prices have historically exceeded inflation by an average of only about 0.5% each year. For Gen Zers, buying a home at an elevated price could make it less likely that their home values appreciate more than inflation.

Additionally, the significant costs of owning a home can make homeownership even less attractive.

"It's not guaranteed to provide any investment return," Silk said of homeownership. "Even if the price rises, the person still has to pay a mortgage, property taxes, insurance, maintenance, etc. If you factor all those things in, many people don't make money even if their home rises in price."

These costs are already putting pressure on current homeowners, and by the time more Gen Zers buy homes, they could be even more burdensome. For example, home insurance costs have risen roughly 20% over the past two years — and could rise an additional 6% this year, according to the insurance comparison shopping site Insurify.

Buying a home doesn't guarantee increasing your wealth

Some people think renting is throwing away money, and in one sense, they're correct. Their monthly payment is gone forever, and it has zero chance of providing an investment return.

In comparison, many people view their downpayment and mortgage payments as investments — money they could earn a return on when they sell their home someday.

But according to Silk, a sizable return is far from guaranteed. And even if a person sells their home for more than they bought it for, that doesn't mean it was necessarily successful from an investment perspective.

"The question from an investment point of view is whether or not the price increases are large enough to cover both inflation and the cost of owning the home," he said. "If your cost of ownership is 8% a year — e.g. interest plus taxes plus maintenance — the home price would have to rise by 8% a year just to break even."

Additionally, Silk said people sometimes forget about the ways homeownership can go wrong. In 2023, there were roughly 357,000 US homes with foreclosure filings, according to the real estate data firm Attom.

While homeownership may have a so-so track record as an investment, Silk said this doesn't mean everyone should rent forever.

"It's not clear," Silk said of whether buying or renting is better from a financial perspective. "It depends on the local real estate markets and the needs and expectations of the person."

Silk said a low mortgage rate, living in the same home for many years, and residing in an area where future housing demand is expected to be strong can give current and future homeowners the best chance of achieving a strong investment return on their home. Of course, checking these three boxes is easier said than done, since people can't predict the future.

Being geographically flexible could also be helpful. In the coming years, some experts think home prices will stagnate or decline in certain areas of the US as new homes are built and retirees sell their homes.

If home prices and rents continue to rise in line with historical levels — something Silk said is far from a guarantee — the "overall cost of owning" a home over the next 30 years could be lower than renting one for the average person, per his calculations.

This means that from a financial perspective, buying could be better than renting for many Americans. But it's not guaranteed to be a home run as an investment — or a ticket to wealth.

Have you gone to great lengths to find a home in your budget? Are you willing to share your story? If so, reach out to this reporter at jzinkula@businessinsider.com.