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'A double-edged sword': 40% of US homeowners wouldn't be able to afford their home if buying today — how some are stuck while others are laughing all the way to the bank

May 22, 2024

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As U.S. home prices have soared over the years, purchasing a home today presents significant challenges.

Compounding the issue is the current interest rate environment. Although high interest rates are intended to cool down the economy and tame inflation, they have not been particularly effective in lowering home prices, which remain stubbornly elevated. Moreover, these high rates have led to increased mortgage costs, resulting in high monthly payments for buyers.

A recent survey commissioned by real estate brokerage Redfin highlights the severity of the situation. Respondents were asked: “If you were looking to purchase a home, do you think you could afford a home like yours in your neighborhood today?”

Just 42.1% of respondents stated they “definitely could” or “probably could” afford it, while 19.9% were unsure if they could afford it, and 38% said they “definitely could not” or “probably could not” afford it.

Affordability crisis

Redfin noted that 59% of homeowners who responded to the question have lived in their homes for at least 10 years, and an additional 21% have lived in their homes for at least five years.

That may explain why it’s difficult for some of them to buy their own home today: these homeowners have witnessed a dramatic increase in housing prices since their initial purchase.

Redfin observed that the median U.S. home sale price, which it says currently stands at $420,000, has doubled over the past decade.

The brokerage also examined the impact of high interest rates. Referencing Freddie Mac’s 30-year fixed-rate average mortgage rate of 7.1%, announced April 18, Redfin calculated that a median-priced U.S. home would require monthly payments of $2,864. However, if the same home were purchased at a 4% mortgage rate, the monthly payment would be approximately $650 less.

Trapped homeowners

If someone purchased a home when prices and interest rates were low — and its value has since skyrocketed — you would think they’re in a strong financial position. However, according to Redfin senior economist Elijah de la Campa, rising home prices can be “a double-edged sword.”

“On the one hand, Americans who already own homes benefit from rising values and they can consider themselves lucky they broke into the housing market while they could still afford it,” he explained. “On the other hand, price appreciation makes the prospect of buying a new home daunting or even impossible for many people who want to move.”

He added that home prices have increased to the point where a similar home in a similar location would now be considerably more expensive than a home someone already owns, even after accounting for inflation. When you factor in higher mortgage rates, upgrading to a larger, more desirable home becomes significantly more expensive and potentially unaffordable.

In other words, being unable to move or upgrade can be a problem for homeowners whose properties have appreciated in value.

For those who do not own a home, the situation is even more challenging. Redfin’s research also revealed that 38% of renters in the U.S. don’t believe they’ll ever own a home, a substantial increase from 27% less than a year ago.

Real estate developers have taken note of the trend and are responding to the new market dynamics. At least one developer is building apartment complexes specifically designed for "forever renters," including those earning over $150,000 a year.

But even renting can be a burden to many. According to a report from Harvard’s Joint Center for Housing Studies, more than 50% of American renters were considered cost-burdened as of 2022. Anyone who spends more than 30% of their income on rent and utilities falls into this category.

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