The Fed study reflects growing pessimism among aspiring homebuyers — especially young homebuyers — as prices have ballooned over the course of the pandemic.
First-time homebuyers are facing one of the toughest real estate markets in decades.
The average interest rate on a 30-year fixed mortgage is more than 7%, the highest since 2002.
One economist expects conditions to improve in 2024 as inflation eases.
Eager homebuyers may be best served by focusing on saving and waiting another 12 months before jumping back into the market, a leading expert on real estate suggests.
“First-time home buyers are facing a double whammy of rising mortgage rates and rents, which make it almost impossible for them to save up for a downpayment on a home right now,” Nadia Evangelou, senior economist for the National Association of Realtors, told Insider on Tuesday.
Evangelou, says the homebuying market will see a sizable drop in activity in 2023 as inventory levels and demand continue to decline. Evangelou estimates that there will be just 4.8 million homes sold in the US in 2023 compared to the more than 5.2 million that will be sold by the end of 2022.
One reason Evangelou points to for the expected decline in activity is high inflation because it drives up the cost of borrowing money and drives down the real incomes of working households. For instance, the latest data from the Bureau of Labor Statistics shows that consumer prices increased by 7.7% year-over-year in October, which some analysts saw as a sign that inflation may have reached its peak in the US.
At the same time, home prices remain elevated across the country despite waning demand as local markets battle inventory shortages and first-time homebuyers compete with big banks and investors for properties. Even smaller investors and flippers are feeling the pain and no longer seeing competition for their properties.
Because of this, Evangelou says first-time homebuyers should plan to compete again in 2024 at the earliest. That’s when NAR expects homebuying activity to increase by approximately 10% as inflation eases.
COVID-19 sent the housing market into a frenzy because of rising demand for home office space and the low-interest mortgage environment, according to research from the Federal Reserve Bank of Dallas. This was compounded by the flood of federal stimulus payments under the CARES Act. In turn, the US median home price has climbed by more than 41% since March 2020, according to the central bank’s branch in St. Louis.
Since then, it has become increasingly difficult for homebuyers to compete in the housing market as rising interest rates have pushed mortgage rates past the 7% mark for the first time since 2002. About 80% of homebuyers described the real estate market as “bad,” according to the November consumer sentiment survey from the University of Michigan.
At the same time, the average homebuyer needs to earn more than $107,000 per year to afford a mortgage on a median-priced home, up more than 46% year-over-year, according to a November report from Redfin. For comparison, the US average hourly wage grew by just 5% over the same time period, the report adds.
“The next couple of years are going to be volatile as households have to deal with elevated inflation,” Evangelou told Insider. “But, even if inflation does accelerate at a slower pace, that doesn’t mean home prices will decrease because there is still a lot of demand and really low inventory.”