First-time buyers out of luck as home prices keep rising

Even though rising mortgage rates put a damper on housing demand, home prices keep chugging higher—offering little reprieve to first-time buyers struggling to enter the market.

According to the S&P CoreLogic Case-Shiller Index, national home prices rose 0.3% in September, marking their eighth consecutive monthly rise. Prices were up 3.9% compared to a year ago.

Prices rose across all 20 major metropolitan regions highlighted in the report, led by Detroit’s 6.7% annual gain. The report authors said price growth “reaccelerate[d] from August,” suggesting that upward cost pressures were still building.

“As we approach the end of 2023, it is unlikely that there will be any major shifts in existing housing market trends, particularly as mortgage rates remain high and the winter is seasonally the slowest time of the year,” the report said.

The report acknowledged that housing activity was the lowest in more than a decade because of the “dramatic increase in homeownership costs.” Yet, home prices continue to rise.

The answer to this paradox may lie in housing supply.

Low demand, higher prices? Blame housing inventory

Part of the reason housing prices still keep rising is low inventory. That means existing buyers are competing for fewer listings and driving up prices.

A housing market is considered healthy when there are between 5-6 months of supply, according to Peter Novak, executive director at Northern Indiana Realtors Association. But current inventories are at roughly half that level.

According to the latest Redfin data, there were roughly 1.55 million homes for sale in the U.S. in October, down 8.7% year-over-year.

With fewer homes going up for sale, buyers increasingly rely on more expensive new builds to satisfy their demand.

“As new home sales surged, new home inventory also grew to a larger share of available inventory,” said Hannah Jones, senior economic research analyst at Realtor.com.

“Almost 1 in every 3 homes available on the market in September was newly constructed, almost twice the pre-pandemic share,” she explained.

First-time buyers are out of luck

Saving up for a down payment used to be the biggest barrier for new home buyers. In today’s housing market, a down payment is only the tip of the affordability iceberg.

Even if we take the “median sales price” of an existing home (which is much lower than the average sales price), a 20% down payment is around $86,000. After that, buyers are on the hook for $2,750 in monthly mortgage and insurance payments.

According to the National Association of Realtors, first-time buyers make up just 26% of all home buyers this year, down sharply from 34% in 2022.

While starter homes are much cheaper, first-time buyers still need to earn 13% more this year than last year to afford one, according to Redfin data.