Gen Z and millennials are driving a significant shift in the real estate landscape, responding to the challenges posed by soaring prices and interest rates that make homeownership increasingly elusive. In this evolving scenario, the term “house hacking” has emerged to encapsulate the innovative practice of renting out sections or entire properties to create an additional income stream.
According to a comprehensive report by Zillow, nearly 4 in 10 recent homebuyers, constituting 39%, consider house hacking to be a “very” or “extremely” important opportunity. This statistic marks a notable increase of eight percentage points over the past two years, indicating a growing recognition of the potential benefits of this unconventional approach to homeownership.
The enthusiasm for house hacking is particularly pronounced among younger generations. In the Zillow survey, over half of millennial homebuyers, accounting for 55%, and 51% of Gen Z homebuyers expressed positive views on this practice. This demographic shift highlights a generational response to the changing dynamics of the housing market and a willingness to explore alternative avenues to achieve homeownership.
Conducted between April and July 2023, the Zillow survey involved more than 6,500 recent homebuyers. The insights gained from this extensive study underscore the shifting mindset among homebuyers, especially in the face of affordability constraints in the current market.
Manny Garcia, Senior Population Scientist at Zillow, claims that these methods “help make those dreams of homeownership penciled into reality, given that there’s so many affordability constraints on the current market.”
The challenges to affordability are starkly evident in the housing market. The median sale price for a house in the U.S. reached $413,874 in October, reflecting a 3.5% increase from the previous year, as reported by real estate site Redfin.
Simultaneously, the average rate for 30-year mortgages surged to 8% in October, marking the highest level seen in 23 years, according to Bankrate. This confluence of factors poses significant hurdles for aspiring homeowners, prompting a reevaluation of traditional approaches to real estate.
Redfin’s analysis further underscores the financial hurdles, revealing that potential homebuyers now need a salary of $114,627 to afford a median-priced house in the U.S. The report, based on a median home price of $420,000 in August, paints a stark picture of the income requirements in the face of escalating housing costs.
Daryl Fairweather, Chief Economist at Redfin, said: “In many places, you need to earn six figures to afford a starter home, so it makes sense for young people who are seeing how expensive homeownership is to want options.”
The scarcity of small starter homes compounds the challenges for millennial and Gen Z buyers, forcing them to consider more expensive homes than they initially intended, as noted by Fairweather. House hacking emerges as a pragmatic solution, offering the flexibility to rent out portions of a newly acquired property to offset higher costs and navigate the limited availability of affordable housing options. “Having the option to rent or have a roommate is important in an environment where there just aren’t that many small homes for sale,” Fairweather explained.
However, the window of opportunity for house hacking may be relatively short-lived. In certain markets, the construction of new apartment buildings, particularly those with smaller one-bedroom units, is underway. This development, coupled with a cooling rental market inflation, has pushed the rental vacancy rate up to 6.6% in the third quarter, the highest level since the first quarter of 2021, according to Redfin data.
Despite the growth in available apartments, the U.S. is grappling with a “massive shortage of housing, especially affordable housing options,” according to Zillow’s Garcia. He suggests that competitively priced homes can still offer a reliable source of income, given the sustained demand for housing in many areas.
Before embarking on the house hacking journey, potential buyers need to consider several factors carefully.
While renting out parts of a property can serve as a supplementary income source, prospective buyers must still secure a sufficient down payment and demonstrate the ability to afford monthly payments without relying on rental income, according to Melissa Cohn, a mortgage banker and regional vice president of William Raveis Mortgage. “If you’re going to rely on rental income in order to qualify, you’ll have a problem,” she told CNBC. “They need to prove they can afford the mortgage without the rent,” she said.
Buying a larger house with the intention of renting part of it carries inherent risks, including being burdened with an expensive mortgage and unrented space. Prospective house hackers are advised to conduct thorough research on current rental rates, consult with rental managers to draft leases, and gain a realistic estimate of prevailing rates in their area. Additionally, they should remain mindful of local ordinances and homeowners association regulations that may impact their ability to rent out parts of their property.