With high mortgage rates and rates, homeowners feel ‘stuck’

When Rachel Burress moved into her mother’s house about a decade ago, it seemed like a short stop on the road to home ownership.

The 35-year-old hairdresser spent those years improving her credit score and saving for a down payment. But with mortgage rates hovering near 7% and house prices soaring, it doesn’t look like the mother-of-three will be signing on the dotted line for a place of her own anytime soon.

“I don’t even know if I’ll ever get out and own my own house,” said Burress, who lives about 20 miles outside of Fort Worth, Texas, in a town called Aledo. “We feel like we’re stuck and it’s so hard to manage.”

Burress’ experience mirrors the millions of Americans who have seen their financial and personal lives hampered by high home prices and high borrowing costs. This may help explain the sour feeling about the state of the national economy.

It also sheds light on an existential angst for many: The American dream seems even more out of reach these days.

For would-be homebuyers like Burress, the combination of high mortgage rates and rising list prices has left them feeling frustrated.

The 30-year mortgage rate, a popular option for home financing in the US, has bounced around 7% in recent months. It retreated after reaching 8% for the first time since 2000 late last year. However, this is still a big jump from the sub-3% levels seen in the early years of the pandemic – which caused a flurry of sales and refinancing in the housing market.

On the other side of the equation, rising sticker prices also add pressure. The Case-Shiller National Home Price Index has taken a hit all time highs This year. Zillow Home Value Index exceeded $360,000 in May, a nearly 50% increase over the same month five years ago.

In turn, the affordability is sharply reduced compared to a few years ago. An April reading on the financial feasibility of home ownership from the Atlanta Federal Reserve Bank was more than 36% discount. the peak of the pandemic recorded in the summer of 2020.

Nationally, the share of income needed to own the median-priced home last topped 43 percent, according to the Atlanta Fed. Anything over 30% is considered unaffordable.

The Atlanta Fed also found that the negative effects of higher interest rates and prices outweighed the benefits of rising incomes for the average American. This underlines the power of these critics, given that the average hourly wage in private payroll has increased by more than 25% between June 2019 and 2024.

This harsh environment has frozen activity for both potential buyers and sellers.

In theory, today’s homeowners should be thrilled to see their property values ​​rise rapidly. But would-be sellers are being deterred by concerns about the interest rate they would get on their next home, creating what a team at the Federal Housing Finance Administration called the “lock-in effect.”

There are already signs of this stagnation in the market: Prices at these levels have resulted in more than 875,000 fewer home sales in 2023, according to the group behind a FHFA Working Paper released earlier this year. That’s a pretty big chunk, like the National Association of Realtors mentionted about 4 million existing homes were sold in the year.

Additionally, the FHFA found that a homeowner is 18.1% less likely to sell for every 1 percentage point their mortgage rate is below the current level. The typical borrower had a mortgage rate that was more than 3 percentage points lower than what they would get in the final quarter of 2023.

If a homeowner had instead bought at the end of last year, the FHFA team found that monthly principal and interest payments would cost about $500 more.

Given that, co-author Jonah Coste said current homeowners touting these low mortgage rates are undoubtedly better off than those looking to buy a first home today. But he said there’s a big catch for this cohort: Moving for a job opportunity or to accommodate a growing family is becoming much more complicated.

“They’re not able to optimize their housing for their new situation,” Coste said of this group. “Or, in some extreme circumstances, they don’t make the big life changes that would require moving.”

That’s the predicament Luke Nunley finds himself in. In late 2020, the 33-year-old healthcare executive bought a three-bed, two-bath home with his wife in Kentucky with less than 3 percent interest. This home has more than doubled in value in almost four years.

After welcoming three children, they’re waiting for a fourth until mortgage rates or house prices drop enough for them to move up. Nunley knows the days of getting under 3% are long gone, but she can’t justify anything over 5.5%.

“It’s just a tough spot to be in,” Nunley said. “We would lose so much money at current prices that it’s basically impossible to move.”

Nunley is part of the vast majority of Americans who default on those high mortgages.

The FHFA found that nearly 98% of mortgages were fixed at a lower than average rate of about 7.2% in the last quarter of last year. Like Nunley’s, nearly 69% had rates more than 3 percentage points lower.

The boom in buying early in the pandemic is one answer to why so many people aren’t paying the current price. This impressive rate can also be explained by the rush to refinance during this period of low borrowing costs in 2020 and 2021.

While these low mortgage rates can help fatten the pockets of those who own them, Jeffrey Roach, chief economist at LPL Financial, warned that it could be bad news for monetary policymakers. That’s because it offers no signs of interest rate hikes from the US Federal Reserve successfully cooling the economy.

To be clear, mortgage rates tend to follow the path of interest rates set by the Fed, but they are not the same thing. But Roach said that so many people being locked into low mortgage rates on their homes helps explain why tighter monetary policy hasn’t been as restrictive as it has historically been.

“Our economy is much less sensitive to interest rates,” Roach said. “That means the high rates aren’t really doing what they should. They’re not putting the brakes on, as you would normally expect.”

A tight supply of homes has kept prices high, even as rising borrowing costs bite into purchasing power. This goes against conventional wisdom, which suggests that prices should fall as prices rise.

In the long term, experts said an increase in the volume of new housing could help expand access and reduce high prices. Specifically, Daryl Fairweather, chief economist at housing market database Redfin, said the national market could benefit from more townhouses and condos that are typically less expensive than standard homes.

For now, this new reality has created generational differences in home ownership and what the path to it looks like.

Zillow found that 34% of all mortgage holders received a financial gift or loan from family or friends for a down payment in 2019. In 2023, that number jumped to 43% as affordability plummeted.

It’s also much harder for young people to find their way into buying a home than it was for their parents, Zillow data shows. Today, it takes almost nine years to save 20% for a down payment using 10% of your average household income each month. In 2000 it took less than six years.

“It’s not the avocado toast,” said Skylar Olsen, Zillow’s chief economist, referring to a joke that millennials spend too much on luxuries like brunch or coffee.

Olsen said younger generations will have to adjust their expectations around ownership given the tougher environment. He said those Americans should wait to rent longer into adulthood or plan to own their first home in part through extra income from renting a room.

For everyday people like Burress, the housing market remains top of mind as the Texan examines her finances and evaluates the candidates in November’s election. The hairdresser continued to help her mom with payments for home insurance, utility bills and taxes in lieu of official rent.

Burress still hopes to one day put that money toward a home equity building property of her own. But time and time again, unexpected expenses like a totaled car or macroeconomic variables like rising mortgage rates have made her feel like the dream is out of reach.

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