Millions of Americans are finding their dreams of owning a home dashed, as rising mortgage rates put purchases out of reach. Many are resigned to renting indefinitely instead. But even the rental market now looks uncertain.
Real estate mogul Grant Cardone blames the policies of the Federal Reserve for “stopping the housing industry” and creating a nation where far more people will be renting homes in the next two years than in the previous five decades.
He argues the Fed’s efforts to curb inflation have succeeded only in driving up borrowing costs to unaffordable levels for many first-time home buyers. This comes even as home prices remain near record highs after rapid gains in recent years.
The Fed will make more renters in this country in the next two years than it has in the last 50 because mortgage applications are at all-time lows,” Cardone said in a recent Fox News interview.
Rates Still Falling, But Remain High
Average 30-year fixed mortgage rates did fall below 7% in mid-December for the first time since August, according to Freddie Mac data. But at around 6.5%, they remain roughly double what buyers could get just two years ago.
With home prices up 6.6% from January nationwide, according to the S&P CoreLogic Case-Shiller home price index, the typical monthly payment on a median-priced home with 10% down is now about $1,800 at current rates. That’s up from around $1,100 at the start of 2022.
This steep payment shock has scared away many house hunters, especially the critical cohort of first-time buyers trying to break into homeownership. Mortgage applications to purchase a home recently hit their lowest level in over two decades, according to data from the Mortgage Bankers Association.
Builders Cut Back as Sales Slump
On the supply side, builders have taken note and curtailed new construction. Housing starts fell 8.8% year-over-year in November.
With fewer buyers able to afford new purchases because of higher rates, and existing owners reluctant to sell and give up their own relatively cheap mortgages, the inventory of homes listed for sale remains mired at record lows. There were just 1.16 million existing homes available for sale nationally at the end of November, down 13.3% from a year ago, according to the National Association of Realtors.
That combination of still-high prices and limited supply leaves first-time buyers with few options. Many are resigning themselves to renting apartments instead, at least for the next couple years.
Rents Falling, But Remain High
The rental market does show early signs of softening, potentially offering some relief. Rents fell 0.6% year-over-year nationally in November, marking the seventh straight monthly decline, according to Realtor.com data on apartments with up to two bedrooms.
But rents remain nearly 10% above pre-pandemic levels, leaving many households still facing affordability issues. Nearly a third of renters nationwide were considered “cost burdened” in the third quarter, spending more than 30% of their income on housing, according to Moody’s Analytics data.
With rents only moderately lower than last year’s peak, buying a starter home is still more cost-effective than renting in most major metros, according to Realtor.com. But falling rents could shift that calculus more toward renting over the coming year.
Oversupply Could Limit Further Rent Gains
There is a massive pipeline of new apartment construction that should help limit future rent increases, notes Danielle Hale, Realtor.com’s chief economist. With nearly 800,000 units underway as of early 2023, additions to supply may outpace demand growth.
As a result, Realtor.com expects rents nationally to decline slightly in 2024, falling around 0.2%. But that will provide little relief in still-expensive coastal markets like New York and San Francisco that have seen some of the biggest rent hikes.
Lost Decade for First-Time Buyers?
So while the rental market looks set to remain fairly stable, the path back to affordable home buying remains unclear. And for many aspiring first-time purchasers, that means their dreams of owning will stay just that.
Grant Cardone argues the solution lies in a change of leadership and policy at the Federal Reserve. He wants to see Fed Chair Jerome Powell “step aside” to allow interest rates to normalize without central bank intervention.
But with most economists expecting the Fed to keep rates relatively high through 2023 to ensure inflation continues slowing, the headwinds for buyers seem unlikely to abate soon.
If mortgage rates do remain around 6% over the coming years, it could make homeownership unfeasible for an entire generation of young Americans. For them, the last decade’s housing boom may become a lost decade – leaving them destined to rent as their childhood dreams of owning a home slip further out of reach.
