Story at a glance
- Rising mortgage rates have deterred Americans from buying homes in greater numbers seen early in the pandemic, leading prices to decrease.
- First-time homebuyers, specifically those in the Millennial and Gen Z demographic, have recently faced hurdles acquiring a home because of high prices and limited housing availability.
- Falling prices may be appealing for younger buyers, but experts say interest rates still provide a major hurdle.
The U.S. housing market has shown signs of cooling in recent months amid the central bank’s efforts to curb record inflation. The rising mortgage rates have deterred Americans from buying homes in greater numbers seen early in the pandemic, leading prices to decrease.
First-time homebuyers, specifically those in the Millennial and Gen Z demographics, have recently faced hurdles acquiring a home because of high prices and limited housing availability. And while the decrease in price tag may be appealing for younger generations, experts say interest rates still provide a major stumbling block.
“Those buyers were of course already frustrated by a lack of inventory, which made purchasing a home difficult in recent years,” Robert Dietz, Chief Economist and Senior Vice President for Economics and Housing Policy for the National Association of Home Builders (NAHB), told Changing America.
“But now that lack of inventory challenge is being replaced by a dramatic decline in housing affordability, which is causing many of those younger homebuyers to essentially exit the market and rent longer or in some cases, double triple up with roommates or even live with their parents.”
Home prices fell again in August, with the median prices listed at more than $406,500, according to the real estate firm Redfin. Yet median prices were up by nearly 7 percent year-over-year, while the number of homes with price drops rose by more than 9 percent over the same period.
Mortgage rates surged past 6 percent earlier this month, marking their highest level since the 2008 housing crisis, even as housing affordability improves modestly.
“Most of the country saw modest improvements in homebuyer affordability for the third straight month because of slightly lower mortgage rates amidst steady income growth. The healthy labor market continues to be a positive for the housing market, despite ongoing economic uncertainty and high inflation,” said Edward Seiler, Mortgage Bankers Association’s (MBA) Associate Vice President, Housing Economics, in a statement on Thursday, announcing findings from MBA’s Purchase Applications Payment Index from August.
“The recent stretch of modest affordability improvement likely hit a speedbump this month, as mortgage rates have jumped above 6 percent,” Seiler added.
Despite declining home prices, the high interest rates will make the market difficult for young buyers who do not have a lot of cash for a down payment, Dietz said.
“[T]he buyers who are hurt the most in terms of the increases in mortgage interest rates are younger, and first-time buyers,” Dietz said. “They are buyers that don’t have a lot of cash savings to put down a large down payment. And so, they tend to be the most sensitive to changes in the monthly payment.”
Dietz added that the buyers who benefit the most, in a relative sense, from a market downturn are cash buyers and investors.
“That purchaser is less sensitive to changes in mortgage interest rates. And they’re more likely to be able to capitalize or benefit from a downturn in demand. And in fact, that’s actually something we’re seeing in the marketplace right now,” Dietz said.
A recent survey revealed not only that Americans expect the housing market to crash, but that they also plan to buy a home if it does. Sixty-three percent of those surveyed said they hope the market crashes — a sentiment held largely by members of Gen Z.
Younger Americans looking for a crash to make homes more affordable, according to the survey, were also the generation with the least amount saved for the purchase. These buyers have saved an average of $15,601 toward a home.
But Dietz explained that key elements for a crash like the one that occurred in 2008 are missing. Instead, he said it is more of a housing recession.
What’s missing from a housing crash are loose lending practices, a housing surplus, including eventual foreclosures from bad mortgages and a “severe economic recession.” Dietz said the current situation, where hot housing markets are experiencing single or even double-digit declines, makes sense as the market resets.
Data from the National Association of Realtors (NAR) show existing home sales fell from July to August by 0.4 percent. This marked the seventh consecutive month of declines. Total housing inventory also decreased in July, falling by 1.5 percent.
“Inventory will remain tight in the coming months and even for the next couple of years,” NAR Chief Economist Lawrence Yun said in a media release. “Some homeowners are unwilling to trade up or trade down after locking in historically-low mortgage rates in recent years, increasing the need for more new-home construction to boost supply.”