Buying a House in America Is Hard These Days

Inventory is low. Mortgage interest rates top 7%. House prices keep going up, and the Fannie Mae Home Purchase Sentiment Index shows 79% of consumers think now is a bad time to buy.

Buying a home is an American dream. However, people seeking new homes are struggling to find one to buy. House hunters find today’s market challenging.

According to United States Federal Reserve data, about two-thirds of Americans own homes. The percentage has been relatively constant in the last six decades, fluctuating between 63% and 69%. It is a rite of passage for many young adults. Buying a home is a sign of financial stability.

However, finding an affordable house is increasingly challenging in all regions of the United States. The reasons vary, but like any financial subject, the causes are not straightforward.

The Great Recession Changed the Rules

The Great Recession was the worst economic decline since the Great Depression. The mid-2000s financial crisis, influenced by the housing bubble’s now-infamous interest rates and loose lending standards, created new challenges for home builders.

Subprime loans targeted house hunters with low incomes or poor credit who otherwise did not qualify for a traditional mortgage. Irresponsible subprime loan disbursement meant many homeowners could not make payments. Many loan recipients defaulted, leading to countless foreclosures and bankruptcies. As stocks crashed, many banks slashed their dividends to zero.

Between 2007 and 2010, plummeting builder revenue and home closings forced many companies to declare bankruptcy and cease operation. Data from the Federal Reserve Bank of St. Louis (FRED) states that the number of housing starts, or new residential construction projects, fell below 500 in April 2009, starkly contrasting the industry peak of around 2,273 in January 2006.

The risky behaviors of the 2000s influenced builders’ and banks’ strategies, resulting in today’s low inventory. Recent FRED data shows that 1,360 private residences began construction in April 2024. Builders apply lessons learned from the late aughts to modern decision-making processes. Many in the housing industry began to make conservative and risk-averse moves; manufacturers increasingly focused on larger, more expensive homes that generate more profit and target older buyers.

Reduced Inventory Limiting Available Homes

Americans linger in their homes for longer, which compounds the inventory issues already complicated by fewer housing starts.

Data from Redfin shows that today’s average U.S. homeowner stays in their home for almost 12 years, nearly double 2005’s average of 6.5 years. This number surges as older homeowners opt to age in place instead of downsizing or relocating as they reach retirement.

The same data shows that around 40% of baby boomers have lived in their homes for at least 20 years. Substantial financial incentives benefit stubborn boomers, as many have paid off their mortgages, and others still making payments were grandfathered into low rates. Additionally, some state tax codes limit property tax increases or assessments, including California’s Proposition 13, which limits assessment to 1% of the market value and annual increases to 2%.

Curbed inventory and few existing home sales result from these market changes. The National Association of Realtors (NAR) reports sales hit a 30-year low in 2023. Only 4.09 million homes sold, marking the weakest sales year since 1995 and the sharpest overall downturn since the late-2000s. “Prospective homebuyers have been shut out of the market by a lack of inventory,” said Lisa Sturtevant, chief economist at Bright MLS.

Home Prices Continue To Rise

Despite lower sales, demand and inventory scarcity put pressure on already-rising prices. Today, the average home price is $492,300, towering above 2013’s average of $334,450. The median price is lower — about $417,700 — as bigger, more costly homes drive up the average.

These eye-opening prices gradually push homeownership beyond the average American family’s reach. Today, mortgage rates are roughly 7%, meaning the average would-be homebuyer’s household must generate $128,000 annually to comfortably afford the average home, despite the nation’s 2022 median household income being $75,000. Unless potential buyers have substantial down payments, these cost-prohibitive numbers paywall many working families out of homeownership.

Mortgage Rates Are the Highest in Years

The current 30-year mortgage rate exceeds 7%, the highest since 2000. Elevated rates keep existing homeowners in place because they must convince themselves to move, exchanging a sub-4% rate for a significantly higher one.

Suppose a potential buyer puts 20% down on a $500,000 home — a 7% interest rate results in a $2,661,21 monthly payment. However, if the rate is lower at 4%, the monthly payment decreases hundreds of dollars to $1,909.66, a meaningful difference of more than $700, which keeps people from making offers on a residence.

Today, It’s Tough To Buy a House

Homeownership remains a primary facet of the American dream despite recent complications. The combination of limited inventory, climbing home prices, and interest rates over 7% have made affordable houses challenging to find and too expensive for many Americans. These hurdles mean homeowner hopefuls struggle more and more to compete.

Prakash Kolli | Wealth of Geeks

This article was produced by Media Decision and syndicated by Wealth of Geeks.


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