Mortgages stuck around 7% force rapid rethink of American dream
A RENTER who hoped to buy a home has resigned himself to rent forever. A first-time buyer who had hoped to refinance a 7 per cent mortgage is pulling back spending everywhere else to keep up. And a young couple is making a painful tradeoff for their family.
As interest rates in the US remain higher for longer, the American dream of affordable homeownership is unattainable for longer – and maybe for good.
Perhaps more than anything else, mortgage rates are the single biggest factor that determine one’s economic mobility in the US. Mortgage rates have been hovering around 7 per cent for over a month – more than double what they were three years ago – and many were counting on them coming down as inflation rapidly retreated toward the end of last year. But price growth ramped back up again to start 2024, and now the Federal Reserve is keeping rates at a two-decade high for the time being.
That unrelenting pressure has upended major life plans for US consumers and could mean staying in a dead-end job or refusing to relocate for a better opportunity, which can affect business and productivity. It’ll likely exacerbate all kinds of gaps in wealth as more people are shut out from buying houses, creating a wider chasm between those who own and those who don’t. While owners benefited from a US$1.3 trillion home-equity windfall in 2023, renters saw costs remain high, pandemic savings dry up and household debt rise.
The numbers are pretty bleak. Renters say there’s a 60 per cent likelihood they’ll never be able to own a home – that’s the highest since the New York Fed started the survey a decade ago. Just 16 per cent of listings last year were affordable for the typical American household, according to real estate brokerage Redfin Corp. And as if a record median US$433,558 price tag for a home wasn’t bad enough, insurance costs and property taxes have also spiked.
It’s so bad, everyone from leading economists to the country’s top leaders – including President Joe Biden and Treasury Secretary Janet Yellen – have bemoaned that the market is “almost impossible” for some homebuyers to crack.
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“Owning a home is a status symbol. But once a status symbol becomes so expensive, people start to reject it as being something that’s worthy of striving for,” said Redfin Chief Economist Daryl Fairweather. “Homeownership is becoming less of a middle-class dream and more of an aspirational dream that comes with above average wealth.”
Better to rent
Historically, those able to afford the upfront costs of buying a home were able to lock in a cheaper monthly housing bill – including property taxes, insurance and mortgage payments – than renters. That changed in 2022, when mortgage rates rose at the fastest clip in decades, with owners last month paying 35 per cent of their income on housing compared to just 29 per cent for renters, according to real estate brokerage Zillow Group. In fact, it’s now cheaper to pay for an apartment than to own the typical home in all but one of the 35 major metros in the US, Zillow data shows.
Borrowing costs have flipped the housing calculus for some like Andrew O’Neil, 39. He believes the “entire concept of homeownership” no longer makes financial sense. O’Neil and his wife sold their Washington, DC, townhouse with a 2.65 per cent mortgage and moved to Westchester County, New York, for his new job in 2021. Initially, they planned to rent for a year while exploring neighbourhoods with good schools for their two children.
When they began their search in 2021, rates were hovering around 3 per cent, meaning they could afford as much as $850,000 for a home. Thanks to a large downpayment from the sale of their previous property, they estimated their monthly housing costs would be around US$4,000. At today’s rates, their monthly mortgage for a home at that price would double.
Currently paying just US$3,500 to rent a three-bedroom home, O’Neil said buying wasn’t just “unaffordable, but a bad housing decision.” Now, he and his wife are content with renting indefinitely, and letting their money grow safely in investments like certificates of deposit instead.
“Before prices went up during the pandemic, you could take a chance and exceed your comfort level. Today, these interest rates are going to financially ruin folks,” said O’Neil. “The payback time for housing is so long, buying a home would hold me back from progressing.”
A popular mantra among real estate agents may have encouraged some to buy beyond their means: “marry the house and date the rate”. Some lenders sweetened deals with offers to refinance for free. But it’s not just borrowing costs. Soaring insurance premiums and higher property taxes have Americans spending more on their homes than ever before.
Major expenses on median-priced homes consumed 32.3 per cent of the average national wage in the first quarter, hovering near record levels seen leading up to the 2008 housing crisis, according to real estate analytics firm Attom. On TikTok, disillusioned homeowners share tips for nearly a third of households who claim to be “house rich and cash poor”.
Those looking to refinance may be on the verge of catching a break – mortgage rates have subsided somewhat in recent weeks as data on US inflation and employment came in softer than expected, as well as other measures of economic activity. But Fed officials have been adamant they’ll need to see additional evidence that price pressures are on a sustainable downtrend before they consider lowering borrowing costs, which will likely keep mortgage rates elevated for some time.
So Meg Bobo will have to hang onto her 7.1 per cent mortgage for a while longer. The 26-year-old software engineer was feeling pressured to buy – or “get locked out for a while”, as her family warned – as rates and home prices continued to climb. She closed on a US$425,000 condo in Nashville on May 1, putting her monthly mortgage payment at about US$2,850. That’s roughly double what she’s paying in rent until she moves in next month. While she’ll have a roommate to help offset the costs, Bobo will have to maintain a strict budget and worries about unpredictable repair expenses.
“I kept thinking over the past few years that prices would get better but that never materialised,” Bobo said. “I do intend to refinance, but I’m thinking it’s probably going to be a couple of years at this point.”
The real costs of housing
For some like Octavio Raygoza and his wife, the financial reality forced them to make difficult decisions. They could buy a home with the space to support a growing family or settle on a smaller house near loved ones. In December 2023, the young parents felt optimistic about finding a million-dollar three-bedroom home in California’s Bay Area. The tech worker and nurse practitioner saved US$200,000 for a down payment and felt encouraged by rates slipping from their peaks.
Instead, they were met by fierce bidding wars – including competing offers as much as 80 per cent over asking – and rising rates that catapulted their monthly mortgage payments from US$8,200 to US$9,500. Ultimately, the couple decided to choose the support of their extended family over having another child.
“Our daughter’s grandparents, cousins, aunts and uncles live in the area. Leaving to buy a home elsewhere is not an option,” said Raygoza, who settled on a quaint two-bedroom bungalow in Berkeley for US$1.24 million – a successful offer 38 per cent over the list price. “We decided to have just one kid. We can’t afford the space for a bigger family.” BLOOMBERG
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