Aspiring homeowners face huge barriers to entry, but experts say they should buy anyway

More than half of aspiring homeowners are staying on the sidelines because of a one-two punch of high inflation and low incomes, according to a recent Bankrate survey.

Many Americans worry they won’t be able to afford a down payment or closing costs, blaming income levels that have lagged near-record home prices.

The American homeownership rate, representing the percentage of owner-occupied homes, hovered at 65.7% as of Q4 2023, according to the U.S. Census Bureau. While off the lows of the last couple of years, the rate is down from 67.9% in 2020.

As of early 2024, the average U.S. home price hovered at $379,100, the highest for any January on record, according to National Association of Realtors data. If you ask the Fed, the median sales price is even higher at around $418,000 as of Q4 2023.

Regardless of the exact level, prices aren’t expected to come down anytime soon.

As bad as it sounds, Bankrate chief economic analyst Mark Hamrick did offer a silver lining: “With so many aspiring homeowners saying they’re not making enough money to afford a down payment, the job market has been more resilient, the economy more robust than many experts expected. That strength can still be leveraged.”

Green shoots of optimism are starting to emerge. For example, the percentage of Americans who believe now is a bad time to shop for a home is declining, falling to 42% from 49% in Q3 2023.

Experts advise aspiring homeowners who are on the fence not to wait too long, as once rates begin to fall, competition for homes will only intensify, driving prices higher still.

Now or never

While low incomes and a high cost of living were the main barriers to first-time homeownership, another big hurdle awaits newbies: high interest rates.

With the 30-year mortgage rate meandering around 7%, the housing market has all but reached a standstill. But it’s only a matter of time before rates fall, a catalyst for more homebuyers to enter the market.

Massachusetts Congresswoman Ayanna Pressley is among lawmakers urging the Fed to start cutting interest rates sooner than later to bolster the housing market and make homeownership more realistic.

“Housing affordability is the No. 1 issue I’m hearing about from my constituents. Families in my district and throughout this country need relief now. I truly hope the Fed listens to them and cuts interest rates,” she said.

On the flip side, more competition for properties would drive lofty home prices even higher, potentially pricing more people out of the market, including those with good credit.

Meanwhile, the high cost of living has diminished earnings for many Americans. In February, consumer prices inched 0.4% higher and 3.2% year-over-year, driven largely by the housing market.

Although Americans are still benefiting from a “strong labor market,” according to JPMorgan, inflation has been eating away at their wage gains, making it difficult for renters to sock away enough cash for the down payment.

These are just some of the reasons why experts’ advice to enter the housing market now is falling on deaf ears.

The American dream or nightmare?

In addition to insufficient income and a high cost of living, participants in the Bankrate survey cited several other barriers preventing them from buying a home.

Nearly one-fifth (18%) of participants blamed excessive credit card debt. Indeed, credit card balances have been rising, topping a combined $1.1 trillion as of Q4 2023.

Aspiring homeowners also feel slighted by family and friends who are unable to help. In response, young adults are living with their parents for longer, including Millennials, approximately 20% of whom say they can do so without paying rent so they can save for a new home.

Yet another roadblock is student loan debt, with 10% of survey respondents unable to afford a home because of it.

With an average balance of over $37,000 and an average monthly payment nearing $300 on the high side, there’s not much wiggle room in budgets to save thousands of dollars for a down payment or closing costs.

As a result, 20% of would-be homeowners have given up hope that they will ever achieve the dream of homeownership in America. The doubters are heavily concentrated among older generations, with 36% and 28% of Baby Boomers and Gen Xers, respectively, counting themselves out.

Millennials and Gen Zers are more likely to see a path to homeownership, with a lesser 18% and 10%, respectively, failing to see a financial path forward.

Americans who expect to save enough money for a down payment one day are prepared to wait, with 18% of those surveyed saying it will take anywhere from roughly three to five years to do so.

Another 13% believe it will take up to seven years before they have socked away enough savings to afford the down payment, which traditionally could be as much as 20% of the purchase price.