The Soaring Cost of Housing for First-Time Homebuyers

JULY 22, 2022

The Soaring Cost of Housing for First-Time Homebuyers

The homebuying market is still entangled in an affordability crisis exacerbated by increasing interest rates. This presents challenges especially for renters who would like to buy homes, according to a report by Harvard University’s Joint Center for Housing Studies. Prohibitively high buying costs are pushing many potential buyers to continue renting, strengthening fundamentals for multifamily real estate.

The number of people in the U.S. within their prime first-time homebuying years is at a historic high. Millennials, our country’s largest generation, are currently 26 to 41 years old, and they’re in the midst of starting families and looking to spread out, according to survey data from the National Association of Realtors.

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New households increased by 1.6 million between the first quarter of 2020 and the first quarter of 2022, according to Harvard’s housing report. An increasing number of households among adults between 35 and 44 years old pushed household growth by an additional 400,000 annually on average over the last five years. Household formation remained constant even through the COVID-19 pandemic, propped up by millennials who had delayed living on their own while in their 20s and early 30s. Yet household formation for this age group is still lower than it was for generations past, suggesting there’s still pent-up demand for this demographic.

Home price appreciation hit 20.6% year-over-year as of March 2022, the Harvard study reports. Sixty-seven of the top 100 housing markets experienced record-high home purchase appreciation rates. Notably, institutional buyers have been aggressively buying up moderately priced homes – 28% of single-family homes sold to investors in the first quarter of 2022, according to CoreLogic.

Broadening inflation has created its own challenges. As the Federal Reserve has ramped up the interest rate in an attempt to chill inflation, the rising rate has significantly impacted the cost of homeownership in an already-costly housing market. The impact of the 2 percentage point hike between late December of 2021 and mid-April of 2022 was equivalent to a breathtaking 27% jump in the cost of buying a home, per the Harvard housing study.

In order to qualify for a home loan, a potential homebuyer would need far more savings and income than they would have just a couple years prior. A down payment for a first-time buyer in the U.S. is typically 7%, amounting to roughly $27,000 as of April of this year. Without any outside help, this requirement would eliminate 92% of renters, whose median savings amount to just $1,500 according to the study.

If we reduce the down payment to just 3.5%, the monthly mortgage payment on a median priced home would hit $2,020. Recent interest rate hikes, combined with increased homebuying prices, would mean the minimum income needed to afford those mortgage payments went up from $79,600 in April 2021 to $107,600 in April 2022, which prices out roughly 4 million renter households with incomes in this range.

Already homebuying has start to slip. As of mid-May, we’ve seen a 16% year-over-year drop in average weekly home purchase mortgage applications. The sale of existing homes has gone down each month from January to April, declining by 13.6% so far, seasonally adjusted.

While rents have also climbed steadily, renting is a more affordable – and more easily accessible – option for millennials, especially considering slowed home construction timelines and extremely limited supply. Though we are now seeing home price growth start to slow, CONTI Capital expects the current housing market to remain favorable to multifamily real estate investment.