It's official: Home prices are up nearly 5% year-over-year in all major U.S. cities, according to a Redfin report released Thursday. Meanwhile, current mortgage rates are approaching a peak of 8% from fall 2023. This deadly combination makes it “nearly impossible” for first-time homebuyers to enter the U.S. housing market, Treasury Secretary Janet Yellen said in testimony before House Ways and Means. The Ways and Means Committee meets on Tuesday.
“It's almost impossible for first-time buyers right now, with home prices going up and interest rates and mortgage rates going up significantly,” Yellen said.
Yellen also cited the lock-in effect as a major hurdle for new buyers. This phenomenon means that current homeowners are reluctant to sell their homes for fear of losing out on low mortgage rates, and end up exchanging them for higher interest rates and higher home prices. But two housing tax credits proposed by President Joe Biden could help alleviate the lock-in effect.
One tax credit provides $10,000 to first-time homebuyers, and another $10,000 tax credit allows homeowners to benefit when they sell their “starter home” and move into a larger home. become. This particular tax credit is expected to result in a much lower supply of starter homes as current homeowners continue to hold on to their current properties. But Redfin says many buyers are still excluded, with the median home price reaching a near-record high of $383,188.
“We know that affordable housing and starter housing is an area where we really need to do a lot of work to increase availability,” Yellen said in her testimony.
Why first-time homebuyers have a hard time finding an affordable home
There are several factors in today's housing market that work against first-time home buyers. Rising home prices and rising mortgage rates have pushed the median monthly home payment to an all-time high of $2,890, a massive 15% increase from a year ago, according to a Redfin report.
The median weekly wage for full-time workers was $1,403 as of the fourth quarter of 2023, according to data from the U.S. Bureau of Labor Statistics. Assuming the median monthly housing payment, homeowners are spending half of their income each month on those costs alone. It is usually recommended that a renter or homeowner should not spend more than 30% of her income on housing, and anything more than that can effectively make her house poor.
Mark Fleming, chief economist at First American, a Fortune 500 financial services company, said spending more than 30% of your income on housing is “generally considered burdensome, and our estimates suggest that spending more than 30% of your income on housing is “This is one of the reasons why housing affordability is at its lowest level in 30 years.” , said earlier luck. “The combination of rising interest rates and continued price increases has made affordability a major challenge for first-time homebuyers.”
In light of soaring home prices, it is becoming increasingly difficult for first-time home buyers to come up with enough cash for a down payment, even for a newly built home. Separate research from Redfin shows that some first-time homebuyers are desperate to come up with cash, with two in five Gen Z and Millennials taking on side jobs to save up for a down payment. It is said that there are some people. Other first-time homebuyers have even chosen to require a cash down payment on their marriage certificate.
Assuming that the median home price in the United States is approximately $383,000 and the standard down payment is 20%, a couple would need to put down an eye-watering $76,000, but many Americans For humans it is impossible.
“That's a lot of cash, and it can be very intimidating for young couples looking to buy their first home,” Zillow personal finance expert Amanda Pendleton previously said. luck. Some first-time home buyers may choose to put down a lower percentage, but they may end up in a lose-lose situation.
“The lower your down payment, the higher your monthly mortgage payments will be,” Pendleton says.
