High Mortgage Rates and Prices Leave Homebuyers Feeling Trapped

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When Rachel Burress moved into her mother’s home a decade ago, she intended it to be a short-term arrangement before buying her own house. Now 35, the hairdresser has spent years improving her credit score and saving for a down payment. However, with mortgage rates around 7% and home prices soaring, it seems unlikely that the mother of three will secure her own place anytime soon.

“I don’t even know if I’ll ever be able to get out and have my own place,” said Burress, who lives in Aledo, Texas, about 20 miles from Fort Worth. “It feels like we’re stuck, and it’s so hard to deal with.”

Burress’s situation echoes that of many Americans whose financial plans have been derailed by high home prices and borrowing costs. This struggle contributes to the widespread dissatisfaction with the current state of the economy and a growing sense that the American dream of homeownership is slipping away.

The Double Bind of High Rates and Prices

For potential buyers like Burress, the combination of high mortgage rates and escalating home prices has created a significant barrier. The 30-year mortgage rate, a common financing option, has hovered around 7% after peaking at 8% late last year, a stark increase from the sub-3% rates seen early in the pandemic. Concurrently, the Case-Shiller national home price index has reached record highs, with Zillow’s home value index exceeding $360,000 in May, a nearly 50% increase from five years ago.

As a result, affordability has plummeted. An April report from the Atlanta Federal Reserve indicated that homeownership affordability had dropped by more than 36% from its peak during the summer of 2020. Nationwide, the income required to afford a median-priced home has risen by over 43%, far exceeding the 30% threshold considered affordable.

Despite rising incomes, the negative impact of high mortgage rates and prices has overshadowed these gains. The average hourly wage for private payrolls increased by more than 25% from June 2019 to 2024, yet this has not been enough to offset the cost of homeownership.

The Stagnation Effect

This challenging environment has cooled both buying and selling activities. While rising property values might seem beneficial for current homeowners, many are hesitant to sell due to the prospect of higher mortgage rates on their next home. The Federal Housing Finance Agency (FHFA) has identified this as a “lock-in effect,” where homeowners are reluctant to move because their existing mortgage rates are significantly lower than current rates.

Research from the FHFA indicates that high rates have led to over 875,000 fewer home sales in 2023. Additionally, the likelihood of a homeowner selling decreases by 18.1% for every percentage point their mortgage rate is below the current rate. This reluctance is evident in cases like that of Luke Nunley, who bought a home in Kentucky in late 2020 at an interest rate below 3%. Now, with three children and another on the way, Nunley finds it financially unfeasible to move due to current rates and home prices.

Generational Challenges and Future Outlook

This new reality has widened generational gaps in homeownership. Zillow reports that the percentage of mortgage holders receiving financial help from family or friends for a down payment rose from 34% in 2019 to 43% in 2023. Saving for a 20% down payment now takes nearly nine years, compared to less than six years in 2000.

Skylar Olsen, chief economist at Zillow, advises younger generations to adjust their homeownership expectations. They may need to rent longer or consider renting out rooms to afford their first home.

For individuals like Burress, owning a home remains the ultimate goal. Despite contributing to her mother’s household expenses, unexpected costs and rising mortgage rates have made homeownership seem increasingly unattainable.

“The ultimate goal for me and my family is to get out of my mom’s house,” she said. But “I feel like I’m on a hamster wheel.”

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