Mortgage rates and home prices are keeping renters from becoming homeowners

Aspiring first-time homeowners are sailing into fierce macroeconomic headwinds as prices and mortgage rates rise, while higher rents make it harder to save for a down payment.

Why it matters: Homeownership is a foundation for middle-class Americans to build long-term wealth. If people can’t afford homes, that American dream becomes even less attainable.

• Plus, homes provide a sense of stability. Assuming you’ve got a fixed-rate mortgage, there’s no equivalent of the landlord hiking your rent every year. (There are, however, plenty of unexpected costs — take it from me, a guy who just got a $2,000 bill to replace corroded pipes.)

Three factors are keeping people stuck in the rent trap.

Rising rents: Rents are up 0.8% over the last month alone, per the government’s latest Consumer Price Index — “the largest monthly increase since April 1986.” They’re up a staggering 5.8% year-over-year, too.

• That’s a problem for anybody trying to save up enough cash for a down payment — as is inflation more broadly.

Rising rates: As the Federal Reserve raises interest rates to battle inflation, mortgage rates are rising in kind. This week’s going rate for an average 30-year fixed rate mortgage is 5.5%, compared to around 3% at the end of last year.

• For a $350,000 loan, that’s a difference of $1,987 in monthly payments vs. $1,476 — or $6,132 annually. Ouch. (And as Axios’ Emily Peck notes, other sources show even higher rent increases.)

Rising prices: The average home went for $507,800 last quarter, per the U.S. Census Bureau. Compare that to the first quarter of 2020 — just before the COVID-19 pandemic — when the average home swapped hands for $383,000.

• Real estate data firm ATTOM recently found that “median-priced single-family homes and condos are less affordable in the second quarter of 2022 compared to historical averages in 97% of counties across the nation with enough data to analyze.”
• Costs associated with homeownership — think maintenance and other stuff renters don’t pay for directly — are at “the highest point since the second quarter of 2007,” per ATTOM, another factor potentially discouraging first-time homebuyers.

Yes, but: At least one trend is pointing in homebuyers’ favor: More listings are hitting the market, which could help suppress prices by increasing supply.

• “The national inventory of active listings increased by 18.7% over last year” in June, per Realtor.com.
• Still, that number was down 34.1% compared to June 2020, and 53.2% compared to June 2019. “In other words, there are a little less than two-thirds the number of homes available compared to June 2020, and less than half compared to June 2019.”
• And fewer homes are being built, fueling a long-running housing shortage.

The other side: From a purely financial point of view, homeownership isn’t always all it’s cracked up to be. “We all know people who bought a home and then regretted it,” Axios’ Felix Salmon wrote a while back. “As Americans delay homeownership, they’re more aware of the possible downsides, more attuned to the idea that their home could turn out to be more of a liability than an asset.”

💬 Our thought bubble: What a mess. My heart goes out to anyone trying to save up for a house right now.

The big picture: People are still buying houses — nearly 700,000 new single-family homes were sold in May 2022 alone, seasonally adjusted. It’s just harder and harder to get the keys.