Mortgage rates and home prices prevent renters from becoming homeowners

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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 rose 0.8% in the last month alone, according to the government’s latest consumer price index – “the biggest 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’s going rate for an average 30-year fixed rate mortgage is 5.5%, down 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, according to the US 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 firm 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.

  • “National active listing inventory increased 18.7% over last year” in June, according to Realtor.com.
  • 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 homes are being built, fueling a long-term 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 some time 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 were sold in May 2022 alone, seasonally adjusted. It’s just getting harder and harder to get the keys.

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