On May 22, 2024, a house was shown for sale in Austin, Texas.
Brandon Bell | Getty Images
When Rachel Burress moved into her mother’s house about a decade ago, it seemed like a brief stop on her path to home ownership.
The 35-year-old barber improved his credit score and saved for a down payment over the years. But with mortgage rates hovering around 7% and home prices skyrocketing, it doesn’t look like the mother of three will be signing on the dotted line anytime soon.
“I don’t even know if I can go out and own my own home,” said Burress, who lives in Aledo, Texas, a small town about 20 miles outside Fort Worth. “It feels like we’re trapped and it’s hard to deal with.”
Burress’ experience mirrors that of millions of Americans whose financial and personal lives have been hampered by rising home prices and high borrowing costs. This helps explain dissatisfaction with the state of the national economy.
It also sheds light on the existential angst of many: The American dream now seems even more out of reach.
double whammy
For aspiring homebuyers like Burress, high mortgage rates and rising sticker prices leave them feeling left out.
On the other hand, rising sticker prices are also adding to the pressure. Case-Shiller national house price index has hit all time high This year. Zillow’s Home Value Index Breaking $360,000 In May, it increased by nearly 50% compared with the same month five years ago.
In turn, affordability has dropped dramatically compared to just a few years ago. Atlanta Fed’s April reading on economic viability of homeownership exceeds 36% discount The epidemic peaked in the summer of 2020.
Nationally, the share of income needed to own a moderately priced home lasted more than 43 percent, according to the Atlanta Federal Reserve. Any percentage above 30% is considered unaffordable.
The Federal Reserve Bank of Atlanta also found that for ordinary Americans, the negative effects of high interest rates and prices far outweigh the benefits of income growth. This highlights the power of these critics because average hourly wage Private salaries increased by more than 25% between June 2019 and 2024.
“A tough place to be”
This grim environment has muted activity from potential buyers and sellers alike.
In theory, current homeowners should be happy to see their property values rise rapidly. But would-be sellers are deterred by worries about the interest rate on their next home, creating what the FHA team calls a “lock-in effect.”
There’s already evidence of market stagnation: Interest rates at this level will result in more than 875,000 fewer home sales in 2023, according to the team behind one project. FHFA working papers Released earlier this year. That’s a pretty big part, because the National Association of Realtors report Approximately 4 million existing homes were sold that year.
In addition, FHFA found that for every 1 percentage point below current levels in mortgage rates, homeowners are 18.1% less likely to sell. Mortgage rates for the typical borrower were more than 3 percentage points lower than mortgage rates in the final quarter of 2023.
If homeowners had purchased a property late last year, the FHFA team found their monthly principal and interest payments would have increased by about $500.
With that in mind, co-author Jonah Coster says homeowners currently touting low mortgage rates are undoubtedly better off than those looking to buy their first home today. But he said this group has a big problem: Moving for job opportunities or to accommodate a growing family has become more complicated.
“They are unable to optimize their housing for their new living conditions,” Koster said of this group. “Or, in some extreme cases, they haven’t made a major life change that would require moving.”
This is the dilemma faced by Luke Nunley. The home’s value has more than doubled in the past four years.
After welcoming three children, they postponed the birth of their fourth until mortgage rates or home prices dropped enough to expand. Nunley knows the days of interest rates below 3% are long gone, but he can’t justify rates higher than 5.5%.
“It’s a really tough situation,” Nalley said. “At current interest rates, we’re going to lose so much money that it’s basically impossible for us to move.”
Most Americans avoid 7%
Nally is one of the vast majority of Americans who don’t have high mortgage payments.
FHFA found that nearly 98% of mortgages had fixed rates below the average rate of about 7.2% in the final quarter of last year. Like Nunley, nearly 69% of respondents saw rates more than 3 percentage points lower.
The buying frenzy in the early days of the pandemic is one reason why so many people aren’t paying going prices. The eye-popping numbers could also be explained by a refinancing boom in 2020 and 2021, a period of lower borrowing costs.
While lower mortgage rates help shore up holders’ wallets, LPL Financial chief economist Jeffrey Roach warned it could be bad news for monetary policymakers. That’s because it provides no sign that the Fed’s rate hikes are successfully cooling the economy.
To be clear, mortgage rates tend to follow the rate levels set by the Federal Reserve, but they are not the same thing. Still, Roach said the fact that so many people are locked into low home loan rates helps explain why tighter monetary policy isn’t as restrictive as it historically has been.
“Our economy is much less sensitive to interest rates,” Roach said. “What that means is that high interest rates are not really having the effect they should. It’s not putting the brakes on as you would normally expect.”
A lack of housing supply has led to rising home prices even as rising borrowing costs have eroded purchasing power. This runs counter to conventional wisdom, which says prices should fall as interest rates rise.
Experts say that in the long term, an increase in the number of new homes will help expand housing supply and reduce high housing prices. In particular, Daryl Fairweather, chief economist at real estate market database Redfin, said the national market could benefit from more townhouses and condos, which are typically less expensive than typical homes.
Townhouse For Sale sign, Corcoran Realty, on the driveway of a Forest Hills townhouse in Queens, New York.
Lindsay Nicholson | Underground CG | Universal Image Group | Getty Images
“ultimate goal”
Currently, this new reality is already creating generational differences in homeownership and the path to achieving it.
Zillow found that 34% of mortgage holders received a financial gift or loan from family or friends as a down payment in 2019.
Zillow data shows that young people have a much harder time buying a home than their parents did. Today, it would take nearly nine years to save 10% of the median household income each month for a 20% down payment. In 2000, it took less than six years.
“This is not avocado toast,” said Zillow chief economist Skylar Olsen. Joking about how much Millennials spend on luxuries like brunch or coffee.
Olson said younger generations should adjust their expectations about ownership given the tougher environment. She said these Americans should expect to rent longer into adulthood or plan to get their first home through the extra income from renting out a room.
For everyday people like Burress, the housing market remains top of mind as the Texan considers his own finances and evaluates the candidates in the November election. The hairdresser continues to help her mother pay home insurance, utility bills and taxes in lieu of formal rent.
Burress still hopes to one day put the money into equity-building properties of her own. But time and time again, unexpected expenses (like a car scrapping) or macroeconomic variables (like rising mortgage rates) made her dream feel like it was just out of reach.
“Leaving my mom’s house was the ultimate goal for me and my family,” she said. But, “it felt like I was on a hamster wheel.”
About The Author
