Showing homes available for sale in Austin, TX on May 22, 2024.
Brandon Bell | Getty Images
“I don't even know if I'll ever be able to go out and have my own home,” said Burress, who lives in Aledo, Texas, about 20 miles from Fort Worth. “We just feel like we're stuck, and it's really hard to cope.”
Burress' experience mirrors that of millions of Americans whose financial and personal lives have been disrupted by soaring home prices and high borrowing costs, which may help explain some of the pessimistic sentiment about the state of the national economy.
It also sheds light on the existential anxieties of many people: the American Dream seems even more out of reach today.
For would-be homebuyers like Burress, the combination of high mortgage rates and rising home prices has them feeling trapped.
Rates on 30-year mortgages, a popular mortgage option in the U.S., have been hovering around 7% for the past few months. Rates have fallen since hitting 8% late last year for the first time since 2000. But they're still up significantly from the sub-3% levels seen early in the pandemic, which prompted a surge in sales, purchases and refinancing in the home market.
Meanwhile, rising home prices are also adding to the pressure: The Case-Shiller National Home Price Index hit an all-time high this year, while the Zillow Home Price Index topped $360,000 in May, up about 50% from the same month five years ago.
Conversely, home affordability is significantly lower than it was just a few years ago: The Federal Reserve Bank of Atlanta's April index of the economic feasibility of homeownership has fallen more than 36% from its pandemic high in the summer of 2020.
Nationwide, the percentage of income needed to own a median-priced home recently surpassed 43%, according to the Atlanta Fed; anything above 30% is considered unaffordable.
The Atlanta Fed also found that the negative effects of high interest rates and prices outweigh the benefits of higher income for the average American. The strength of these critics is underscored when you consider that the average hourly wage in the private sector is set to rise by more than 25% between June 2019 and 2024.
This challenging environment has dampened activity from both potential buyers and sellers.
In theory, current homeowners should be happy about soaring property values, but potential sellers are being held back by concerns about what interest rates will be available on their next home purchase, creating what the FHA team calls a “lock-in effect.”
We're already seeing evidence of this slowdown in the market: According to a team from an FHFA working paper released earlier this year, interest rates at this level could reduce home sales by more than 875,000 in 2023. That's a significant number, considering that the National Association of Realtors reported that about 4 million existing homes were sold that year.
Additionally, the FHFA found that for every percentage point that mortgage rates were one percentage point lower than current levels, homeowners were 18.1 percent less likely to sell their homes. A typical borrower's mortgage rate was more than three percentage points lower than the rate they would have gotten in the fourth quarter of 2023.
The FHFA team found that homeowners would have paid about $500 more in monthly principal and interest payments if they had purchased late last year.
Co-author Jonah Coste said that with this in mind, today's homeowners touting these low mortgage rates are arguably better off than those looking to buy their first home today. But he said this generation faces a big downside: Moving as they start jobs or have growing families is going to be much more complicated.
“They haven't been able to optimize their housing for their new living situation,” Coste said of this group, “or, in extreme circumstances, haven't made any major life changes that would require them to relocate.”
That's the predicament Luke Nunley finds himself in. In late 2020, the 33-year-old health care administrator and his wife bought a three-bedroom, two-bathroom home in Kentucky with an interest rate of less than 3%, and the home's value has more than doubled in nearly four years.
After having three children, they are holding off on having a fourth until mortgage rates and home prices fall enough to allow them to upsize. Nunley acknowledges that the days of being able to get interest rates below 3 percent are long gone, but he can't justify rates above 5.5 percent.
“This is a really tough situation,” Nunley said. “At the current rates, we're losing so much money that we basically can't relocate.”
Nunley is among the vast majority of Americans who are not paying these costly mortgages.
The FHFA found that about 98% of mortgages in the fourth quarter of last year were fixed at about 7.2% below the average interest rate. About 69% of mortgages, like Nunley's, had rates more than 3 percentage points lower.
The home-buying boom that occurred early in the pandemic is one reason so many people aren't paying fair rates. The shocking numbers can also be explained by a rush to refinance when borrowing costs were low in 2020 and 2021.
While these low mortgage rates may help line the pockets of mortgage holders, Jeffrey Roach, chief economist at LPL Financial, warned that they could be bad news for monetary policymakers, because there's no sign that the Fed's rate hikes will successfully cool the economy.
To be clear, mortgage rates tend to track the rate levels set by the Fed, but they're not the same thing. Still, the fact that so many people are locked into low mortgage rates helps explain why tight monetary policy has historically felt less restrictive, Roach said.
“Our economy is not that sensitive to interest rates,” Roach said. “That means high interest rates aren't doing what they should be doing. They're not putting the brakes on the economy like you would normally expect.”
A low supply of homes has kept home prices high even as rising borrowing costs squeeze purchasing power, countering conventional wisdom that says higher interest rates should lead to lower home prices.
In the long run, experts say a rise in the supply of new homes could help expand access to housing and keep prices down. In particular, Daryl Fairweather, chief economist at housing market database Redfin, says the rise of townhomes and condominiums, which are cheaper than a typical home, could benefit the national housing market.
A Corcoran Realty townhouse for sale sign sits in the driveway of a rowhouse in Forest Hills, Queens, New York.
Lindsay Nicholson | UCG | Universal Images Group | Getty Images
For now, this new reality is creating generational differences when it comes to homeownership and the journey.
According to a Zillow survey, 34% of mortgage holders received financial gifts or loans from family or friends for a down payment in 2019. By 2023, that number has jumped to 43% due to homebuying challenges.
And according to Zillow data, it's much harder for young people to get on track to buy a home than it was for their parents: Today, it takes almost nine years to save up a 20% down payment using 10% of the median monthly household income; in 2000, it took less than six years.
“The problem isn't avocado toast,” Zillow chief economist Skyler Olsen said, referencing a joke that millennials spend too much on luxuries like brunch and coffee.
Olsen said younger generations should adjust their expectations around homeownership given the tougher environment: Younger Americans should prepare to live in rented homes for longer periods into adulthood, or plan to buy their first home with the extra income they can make by renting out rooms, she said.
The housing market remains a top priority for ordinary people like Burress, as the Texas native weighs her own financial situation while evaluating candidates for the November election. Instead of paying official rent, the hairdresser continues to help her mother pay home insurance, utilities and taxes.
Burress still hopes to one day invest that money in real estate to build her wealth, but unexpected expenses, like totaling her car, and macroeconomic fluctuations, like rising mortgage rates, have often made that dream feel out of reach.
“Moving out of my mom's house is the ultimate goal for me and my family,” she said, “but it feels like we're on a hamster wheel.”
