This pains me to say, but I’m glad I‘m not in my 30s anymore. Not because I didn’t think it was the best decade of my life, but because I would hate being in the real estate market now shopping for my first home.
Housing affordability is hitting first-time buyers the hardest. They’re getting it from all sides, high prices, low inventory, tremendous levels of inflation and interest rates that keep inching up. Back in 2020 and 2021, buying a home was more affordable due to record-low interest rates in spite of the fact that inventory was also extremely low. The big question is, will this ever happen again?
Now, however, interest rates and prices are still going up, and although there is some movement in the amount of inventory available, it is still historically low. Now that the Federal Reserve has raised rates again at the end of July to another 0.75%, everyone is watching the mortgage rates to see what happens. As of this writing, the rates went up slightly and were standing last week at an average of 5.55% for a 30-year fixed mortgage per Forbes.
Since the rates have increased, many of the first-time buyers who were doing pretty well on the affordability scale are dropping out of the market. Not only are the monthly mortgage carrying charges going up with the rates, but likely their rent is also climbing too, creating a situation where nothing is being added to their down payment nest egg.
The result of this is the share of first-time buyers is dropping every month. A year ago, their market share was about 31% per The National Association of Realtors, but this year that percentage is dropping into the mid-20% range. In addition, millennials who are between 25 and 40 years old, the age when most adults are starting to own a home and build equity in that home, are being denied that opportunity.
In addition, the favorable tax position that homeowners have is also eating into their wealth. Many of these first-time buyers also live with the fear of overpaying for a home in the real estate frenzy that’s been going on, stretching to buy that home and worrying that it could come crashing down on them. Everyone remembers the financial crisis that was largely fueled by an overheated real estate market and way too careless lending practices.
The National Association of Realtors’ housing affordability index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data. The last time this was updated was in May of this year when the index fell to 102.5. This was the lowest level of affordability since the index fell to 100.5 in July 2006. Also, this was very close to the lowest level recorded in July 1990 when the index stood at 100.2.
The decline in affordability makes it especially difficult for first-time home buyers to find their way into the real estate market. There are economists who say we may never see the level of affordability we experienced in the past year or two again. This perfect storm of COVID-19, inflation, interest rates and housing shortages has put an enormous burden on this generation, and it will affect the country’s economy for many years to come. The answer is yes, we are in a housing affordability crisis right now, ask a 30-year-old.
