Mortgage rates and home prices prevent renters from becoming homeowners

Aspiring first-time homeowners navigate fierce macroeconomic headwinds as prices and mortgage rates rise, while higher rents make it harder to save for a down payment.

Why is this important: Home ownership is a foundation for middle-class Americans to build long-term wealth. If people can’t afford a home, that American dream becomes even less achievable.

  • In addition, the houses provide a sense of stability. Assuming you have a fixed rate mortgage, there is no equivalent for the landlord to increase your rent every year. (There are, however, a lot of unexpected costs – trust me, a guy who just got a $2,000 bill to replace corroded pipes.)

Three factors maintain people stuck in the rent trap.

Rising rents: Rents have risen by 0.8% in the last month alone, according to the latest government report Consumer price index — “the largest monthly increase since April 1986.” They were also up 5.8% year-over-year.

  • This is a problem for anyone trying to save enough money for a down payment, just like inflation in general.

Rates up: As the Federal Reserve raises interest rates to fight inflation, mortgage rates rise in kind. This week current rate for an average 30-year fixed-rate mortgage is 5.5%, up from around 3% at the end of last year.

  • For a $350,000 loan, that’s a difference of $1,987 in monthly payments versus $1,476, or $6,132 per year. Ouch. (And as Axios’ Emily Peck notes, other sources show even higher rent increases.)

Price up: The average home cost $507,800 last quarter, by the United States Census Bureau. Compare that to the first quarter of 2020 – just before the COVID-19 pandemic – when the average house traded hands for $383,000.

  • Real estate data company ATTOM recently found that “median-priced single-family homes and condos are less affordable in the second quarter of 2022 compared to historical averages in 97% of counties nationwide with enough data to analyze.”
  • Costs associated with home ownership – think maintenance and other things tenants don’t pay directly – are at “the highest point since the second quarter of 2007”, according to ATTOM, another likely to discourage first-time homebuyers.

Yes, but: At least one trend is pointing in favor of homebuyers: more listings are coming onto the market, which could help lower prices by increasing supply.

  • “The national inventory of active listings increased 18.7% from a year ago” in June, per real estate
  • Yet that number was down 34.1% from June 2020 and 53.2% from June 2019. “In other words, there are just under two-thirds of the number of homes available compared to June 2020, and less than half compared to June 2020. to June 2019.”
  • And fewer houses are being builtfeeding a long housing shortage.

The other side: From a purely financial point of view, home ownership is not always what it is supposed to be. “We all know people who have bought a house and then regretted it,” Axios’ Felix Salmon wrote a while ago. “As Americans delay homeownership, they are more aware of the possible downsides, more sensitive to the idea that their home might turn out to be more of a liability than an asset.”

💬 Our thought bubble: What a mess. My heart goes out to anyone trying to save for a home right now.

The big picture: People are still buying homes – nearly 700,000 new single-family homes have been sold in May 2022 only, seasonally adjusted. It’s just getting harder and harder to get the keys.

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