A home for sale is shown in Austin, Texas on May 22, 2024.
Brandon Bell |
When Rachel Burress moved into her mother's house about ten years ago, it seemed like a short-term stopover on the road to homeownership.
The 35-year-old hairdresser spent those years building up her credit score and saving for a down payment. But with mortgage rates hovering at nearly 7% and real estate prices skyrocketing, it doesn't look like the mother of three will be signing a home purchase agreement of her own anytime soon.
“I don't even know if I'll ever get out and own my own home,” said Burress, who lives about 20 miles outside of Fort Worth, Texas, in a town called Aledo. “It feels like we're just stuck, and it's so hard to cope.”
Burress' experience is typical of millions of Americans whose financial and personal lives have been affected by high home prices and borrowing costs. This may explain the doom and gloom about the state of the national economy.
It also sheds light on an existential fear that plagues many people: the American dream seems even more unattainable today.
A double blow
For prospective homebuyers like Burress, the combination of high mortgage rates and rising list prices leaves them feeling disadvantaged.
The interest rate on 30-year mortgages, a popular option for home financing in the U.S., has been hovering around 7% in recent months. Late last year, it hit 8% for the first time since 2000. But that's still a big jump from the sub-3% seen in the early years of the pandemic – which led to a flood of sales and refinancings in the housing market.
On the other side of the equation, rising list prices are also adding pressure. The national Case-Shiller home price index has hit an all-time high this year. Zillow's home value index surpassed $360,000 in May, up nearly 50 percent from the same month five years ago.
In turn, affordability has fallen sharply compared to a few years ago. A reading of the economic feasibility of homeownership released by the Atlanta Federal Reserve in April was more than 36% below the peak recorded in summer 2020 during the pandemic.
According to the Atlanta Fed, the percentage of income required to own an average-priced home recently topped 43% nationwide. Any percentage above 30% is considered unaffordable.
The Atlanta Fed also found that the negative impact of high interest rates and prices far outweighed the benefits of rising incomes for average Americans, underscoring the strength of these critics given that average hourly wages in the private sector increased by more than 25% between June 2019 and 2024.
“A difficult situation”
This tough environment has slowed activity among both potential buyers and sellers.
In theory, current homeowners should be happy about the rapid increase in value of their property. But potential sellers are deterred by concerns about what interest rate they might get on their next home, leading to what a team at the Federal Housing Finance Agency calls the “lock-in effect.”
There are already signs of this market weakness: According to the team behind an FHFA working paper released earlier this year, interest rates at that level would result in more than 875,000 fewer home sales in 2023. That's a significant chunk, given that the National Association of Realtors reported that about 4 million existing homes were sold in the year.
In addition, the FHFA found that the likelihood of a homeowner selling drops by 18.1% when their mortgage rate is 1 percentage point below current levels. The typical borrower had a mortgage rate that was more than 3 percentage points below what they would have received in the last quarter of 2023.
The FHFA team found that this homeowner would have to pay about $500 more in monthly principal and interest payments if he had purchased late last year instead.
With that in mind, said co-author Jonah Coste, current owners touting those low mortgage rates are undoubtedly better off than those looking to buy their first home today. But he said there's a big catch for that group: Moving for a job opportunity or to accommodate a growing family becomes much more complicated.
“They are unable to adapt their housing to their new living situation,” Coste said of this group. “Or, in some extreme cases, they are not making the major changes in their lives that would require a move.”
That's the predicament Luke Nunley finds himself in. In late 2020, the 33-year-old healthcare administrator and his wife bought a three-bedroom, two-bathroom home in Kentucky at an interest rate of less than 3%. That home has more than doubled in value in nearly four years.
After having three children, they wait to have a fourth until mortgage rates or home prices have dropped enough for them to expand. Nunley knows the days of getting an interest rate under 3% are long gone, but he can't justify anything over 5.5%.
“It's just a difficult situation,” Nunley said. “At current rates, we would lose so much money that it's basically impossible for us to do anything.”
Most Americans avoid 7%
Nunley is among the overwhelming majority of Americans who do not pay these large mortgages.
The FHFA found that nearly 98 percent of mortgage loans were priced at a rate below the average rate of about 7.2 percent in the final quarter of last year. As with Nunley, nearly 69 percent had rates that were more than three percentage points lower.
The buying boom at the beginning of the pandemic is one answer to why so many people are not paying the usual interest rate. This staggering number can also be explained by the rush for refinancing during the period of low borrowing costs in 2020 and 2021.
While these low mortgage rates may help fill the wallets of mortgage holders, Jeffrey Roach, chief economist at LPL Financial, warned that this could be bad news for monetary policymakers because there is no evidence that Federal Reserve rate hikes will successfully cool the economy.
To be clear, while mortgage rates tend to follow the Fed's rate level, that's not the same thing. But Roach said the fact that so many people are locked into low home loan rates explains why tighter monetary policy doesn't feel as restrictive as it has in the past.
“Our economy is much less sensitive to interest rates,” Roach said. “That is, high interest rates are not really doing what they are supposed to do. They are not slowing down the economy as one would normally expect.”
The low supply of housing has kept prices high, even as high borrowing rates have affected purchasing power. This contradicts the common belief that prices should fall when interest rates rise.
Over the long term, experts say, an increase in new construction could help expand access and curb high prices. In particular, Daryl Fairweather, chief economist at real estate market database Redfin, said the national market could benefit from more townhomes and condos, which are generally less expensive than regular homes.
“Townhouse for sale” sign, Corcoran Realty, in the driveway of the townhouses, Forest Hills, Queens, New York.
Lindsey Nicholson | Universal Images Group | Getty Images
'The ultimate goal'
This new reality has initially led to generational differences regarding the question of whether one has one's own home and how the path to it looks.
Zillow found that 34% of all mortgage holders received a financial gift or loan for a down payment from family or friends in 2019. In 2023, that number rose to 43% as affordability plummeted.
Plus, it's much harder for young people to navigate the path to homebuying than it was for their parents, Zillow data shows. Today, it takes nearly nine years to save 20 percent for a down payment, while spending 10 percent of the median household income each month. In 2000, it took less than six years.
“It's not the avocado toast,” says Skylar Olsen, chief economist at Zillow, alluding to a joke that millennials spend too much on luxuries like brunch or coffee.
Olsen said younger generations should adjust their expectations of ownership given the more challenging environment. She said these Americans should expect to rent longer into adulthood or plan to purchase their first home in part with additional income from renting out a room.
For regular people like Burress, the housing market remains a major topic as the Texan examines her financial situation and evaluates candidates for the November election. The hairdresser has continued to help her mother pay her home insurance, utilities and taxes instead of paying formal rent.
Burress still hopes to one day invest the money in a property that will build her equity, but time and time again, unexpected expenses like a total loss or macroeconomic variables like rising mortgage rates have made her feel like her dream is out of reach.
“For me and my family, the ultimate goal is to get out of my mother's house,” she said. But “it feels like I'm on a hamster wheel.”
Comments are closed.