High mortgage rates and prices leave homebuyers trapped

When Rachel Burress moved into her mother’s house a decade ago, she intended it to be a short-term arrangement before she bought her own home. Now 35, the hairdresser has spent years improving her credit score and saving for a down payment. But with mortgage rates hovering around 7 percent and home prices skyrocketing, it seems unlikely the mother of three will secure her own home any time soon.

“I don’t even know if I’ll ever be able to get out and have my own place,” said Burress, who lives in Aledo, Texas, about 20 miles from Fort Worth. “It feels like we’re stuck, and it’s so hard to deal with.”

Burress’s plight echoes that of many Americans whose financial plans have been hampered by high home prices and borrowing costs. This struggle contributes to widespread dissatisfaction with the current state of the economy and a growing sense that the American dream of homeownership is fading.

The double bind between rates and high prices

For prospective buyers like Burress, the combination of high mortgage rates and rising home prices has created a significant barrier. The 30-year mortgage rate, a common financing option, has hovered around 7% after peaking at 8% late last year, a sharp increase from rates below 3% at the start of the pandemic. At the same time, the national Case-Shiller home price index has hit record highs, with Zillow’s home value index topping $360,000 in May, up nearly 50% from five years ago.

As a result, affordability has plummeted. An April report from the Atlanta Federal Reserve said homeownership affordability has fallen more than 36% since its peak in the summer of 2020. Nationwide, the income needed to afford a median-priced home has increased more than 43%, far exceeding the 30% threshold considered affordable.

Despite rising incomes, the negative impact of high mortgage rates and prices has overshadowed these gains. The average hourly wage for private payrolls increased by more than 25% from June 2019 to 2024, but this has not been enough to offset the cost of homeownership.

The Stagnation Effect

This challenging environment has dampened both buying and selling activity. While rising home values ​​may seem beneficial to current homeowners, many are hesitant to sell because of the prospect of higher mortgage rates on their next home. The Federal Housing Finance Agency (FHFA) has called this a “lock-in effect,” where homeowners are reluctant to move because their existing mortgage rates are significantly lower than current rates.

FHFA research indicates that high rates have led to more than 875,000 fewer home sales in 2023. Additionally, the likelihood of a homeowner selling decreases by 18.1% for every percentage point that the mortgage rate is below the current rate. This reluctance is evident in cases like Luke Nunley, who purchased a home in Kentucky in late 2020 at an interest rate of less than 3%. Now, with three children and another on the way, Nunley finds it financially impractical to move due to current rates and home prices.

Generational challenges and future prospects

This new reality has widened generational gaps in homeownership. Zillow reports that the percentage of mortgage holders receiving financial help from family or friends for a down payment has increased from 34% in 2019 to 43% in 2023. Saving for a 20% down payment now takes nearly nine years, compared to less than six years in 2000.

Skylar Olsen, chief economist at Zillow, advises younger generations to adjust their expectations about home ownership. They may have to rent longer or consider renting out rooms to afford their first home.

For individuals like Burress, home ownership remains the ultimate goal. While it helps pay for their mother’s household expenses, unexpected costs and rising mortgage rates have made home ownership increasingly out of reach.

“The ultimate goal for me and my family is to get out of my mom’s house,” she said. But “I feel like I’m on a hamster wheel.”