High prices and mortgage rates leave aspiring and current homeowners feeling 'stuck'

• The cost of homeownership has increased significantly, forcing individuals to adjust their expectations about the attainability of owning a home.
• The current economic situation is causing additional hardships for individuals and threatening a fundamental aspect of the American ideal.

Rachel Burress's move into her mother's house a decade ago was viewed as a temporary step towards owning a home.

Despite spending 35 years improving her credit score and saving for a down payment, the hairdresser may not be able to buy a home due to high mortgage rates and rising home prices.

"Burress, who resides about 20 miles from Fort Worth, Texas, in Aledo, stated, "I have no idea if I'll ever be able to leave and own my own home. It's like we're trapped, and it's so difficult to cope with.""

The high cost of homes and borrowing has negatively impacted millions of Americans, including Burress, which may contribute to the negative perception of the national economy.

The attainment of the American dream appears increasingly elusive in today's society.

A double whammy

High mortgage rates and rising list prices have left aspiring homebuyers like Burress feeling excluded.

The 30-year mortgage rate, a widely used financing option in the US, has fluctuated between 7% and 8% in recent months. After reaching 8% for the first time since 2000, it has since decreased. However, this is still a significant increase from the sub-3% rates seen early in the pandemic, which led to a surge in sales and refinancing in the housing market.

Rising sticker prices are also contributing to the pressure, as the Case-Shiller national home price index has reached new highs this year. Additionally, Zillow's home value index surpassed $360,000 in May, representing a nearly 50% increase from the same month five years ago.

The affordability of homeownership has decreased significantly compared to a few years ago, according to an April reading from the Atlanta Federal Reserve, which was more than 36% lower than the pandemic high recorded in the summer of 2020.

The Atlanta Fed reported that the share of income required to own the median-priced home nationally exceeded 43% for the first time. Any percentage above 30% is deemed unaffordable.

Despite the increase in average hourly wages on private payrolls by more than 25% between June 2019 and 2024, the Atlanta Fed found that the benefits of growing incomes were outweighed by the negative effects of high rates and prices for the typical American.

'A tough spot'

This tough environment has chilled activity for potential buyers and sellers alike.

The "lock-in effect" is a phenomenon that occurs when current homeowners are excited about their property values rising quickly, but prospective sellers are deterred from selling due to concerns about the interest rate they would receive on their next home.

The FHFA discovered that for every 1 percentage point below the current mortgage rate, a homeowner is 18.1% less likely to sell their home. The typical borrower had a mortgage rate that was 3 percentage points lower than what they would have received in the final quarter of 2023.

If the homeowner had purchased at the end of last year, the FHFA team determined that their monthly principal and interest payments would be approximately $500 higher.

Jonah Coste, co-author, stated that while current homeowners are benefiting from low mortgage rates, those seeking to purchase their first home may face challenges. However, he emphasized that relocating for a job opportunity or to accommodate a growing family becomes increasingly complex for this group.

"According to Coste, this group is unable to optimize their housing for their new life situation or make significant life changes that would require relocation in extreme circumstances."

Luke Nunley, a 33-year-old health administrator, and his wife purchased a three-bed, two-bath house in Kentucky in late 2020 at an interest rate under 3%. The value of their home has more than doubled in almost four years.

Nunley, who welcomed three kids, is delaying a fourth until mortgage rates or home prices decrease enough to allow for an upsize. Although Nunley knows that obtaining a rate below 3% is unlikely, they cannot justify anything above 5.5%.

"Nunley stated that it is a challenging position to be in as we would be losing a significant amount of money at the current rates, making it nearly impossible for us to relocate."

Most Americans skirt 7%

Nearly 98% of mortgages were fixed at a rate below the average of around 7.2% in the final quarter of last year, with close to 69% having rates more than 3 percentage points lower.

Low mortgage rates can benefit those who hold them financially, but Jeffrey Roach, LPL Financial's chief economist, cautioned that it may negatively impact monetary policymakers as it does not signal interest rate hikes from the Federal Reserve successfully slowing down the economy.

While mortgage rates generally follow the trajectory of Fed-determined interest rates, they are not identical. Roach explained that the large number of individuals with low mortgage rates on their homes contributes to why tighter monetary policy has not felt as restrictive as it traditionally has.

"Roach stated that our economy is not as sensitive to interest rates as it used to be. As a result, high rates are not effectively slowing down the economy as expected."

Despite the increase in borrowing fees, the low housing supply has maintained high prices, contradicting the conventional wisdom that prices should decrease with rising interest rates.

'The ultimate goal'

The current reality has resulted in variations in homeownership among different generations and the paths to achieving it.

Young people face a greater challenge in saving for a home down payment than their parents did, according to Zillow data. While it took just under six years to save 20% for a down payment using 10% of the median household income every month in 2000, today it takes almost nine years to achieve the same goal.

Skylar Olsen, Zillow's chief economist, stated that the avocado toast joke about millennials' spending on luxuries like brunch or coffee does not apply to her.

Everyday people like Burress are constantly thinking about the housing market as they assess their financial situation and evaluate the candidates running for office in November. Despite not having a formal rental agreement, the hairdresser has been assisting her mom with paying for home insurance, utility bills, and taxes.

"My ultimate goal is to leave my mom's house with my family, but I feel like I'm stuck in a hamster wheel."