Why Are Things So Tough for First-time Homebuyers?

Why Are Things So Tough for First-time Homebuyers?

A little over a decade ago, about half of homes were being sold to first-time buyers.

Things have changed.

Now, only 27% of sold homes are going to first-time buyers. It isn’t that people aren’t interested in purchasing a home – after all, demand for homes was turbocharged during the course of the COVID-19 pandemic.

But first-time homebuyers are having an exceptionally hard time breaking into the market. What gives? Why are a record low proportion of properties being sold to people buying their first home?

1. High Price of Homes

The first reason first-time homebuyers are having a hard time accessing the market is the sky-high price of homes.

Home prices have risen nearly 20% in the past year – representing an unusual and historic surge that disadvantages first-time buyers, who are typically younger, haven’t accumulated housing equity, and don’t have the means to make a sizable down payment.

Whether rising home prices will abate at some point this year is hotly debated, but the price of homes has been juiced by three interrelated factors:

  1. Inventory: Housing inventory remains at a record low, and continued supply chain bottlenecks leaves most experts predicting low inventory for the foreseeable future.
  2. Inflation: Inflation is at its highest rate in 40 years, increasing the price of consumer goods and services – including homes and the materials necessary to build them.
  3. Investors: Investors buy about one-third of homes in the U.S., increasing competition for available homes. Rising inflation could cause even more investors to flood the housing market, as real estate is traditionally seen as a safe investment against devalued currency.

Overall, rising prices is the biggest challenge for anyone – especially those making their first purchase – who wants to buy a home.

2. Rising Interest and Mortgage Rates

The high price of homes alone serves as an impediment for first-time homebuyers. But it’s not the only factor boxing first-time buyers out of the real estate market.

Rising interest and mortgage rates are also squeezing first-time homebuyers especially hard.

Consider a couple buying their first home. They’re targeting a mortgage of $200,000, which is already far lower than the median in many markets. Rising interest rates, which the Federal Reserve introduced to tamp down inflation, have risen from 2.6% to around 5% in the past 16 months. The $200,000 mortgage the buyers are targeting? It’s now more than $200 per month more expensive than it would have been 16 months ago.

Skyrocketing mortgage rates mean that the competition for affordable homes is even higher than before – prospective buyers seem, on average, aware that rates are likely to rise even further in the short and medium-term.

3. Slowing Wage Growth

As if rising home prices and steeper mortgage rates weren’t enough, first-time homebuyers also face the new challenge of apparently slower wage growth.

In the wake of the COVID-19 pandemic, government stimulus, and a historically tight labor market, American wages grew fast. But that wage growth has cooled somewhat in the early part of 2022, with more people working or looking for work and employers feeling less pressure to offer pay increases to bring people into the labor force.

Slower wage growth may be a relief to people concerned about inflation, but is in the short-term a major difficulty for homebuyers, especially those purchasing for the first time. Wages are generally not keeping pace with inflation, and the preexisting high price of homes and rising mortgage rates mean that many young buyers are less equipped to buy than they were months ago.

For the immediate future, first-time homebuyers are likely to struggle to enter the housing market. In the long term, tapering home prices and mortgage rates and increased inventory could make for a friendlier first-time homebuyer market.