‘Backed Into a Corner.’ Why First-Time Home Buyers Are Simply Walking Away.

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When Kellie Stofko and her fiancé, Liam McRae, started house hunting last August, it was with the vision of trading their 800-square-foot Atlanta apartment for a roomier home of their own in time for the holidays.

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Half a year, dozens of home tours, and eight unsuccessful bids later, Stofko, 25, and McRae, 26, have moved to the sidelines. “This has been the most stressful six months of my life,” Stofko says, adding that she and her fiancé delayed wedding planning to focus on their ultimately unsuccessful search for a home.

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Among the culprits: a flood of money from other buyers has sent prices surging around the country. Stofko says she and her partner lost out to house hunters with more money on multiple occasions. “We really feel like we’ve been backed into a corner and just nudged out by these all-cash buyers,” she complains.

A historic run-up in home prices, a recent surge in mortgage rates, and a stubbornly low inventory of available homes are pushing this slice of the American dream out of the grasp of an increasing number of buyers, with more likely to join in the coming months. National Association of Realtors senior economist Nadia Evangelou estimates that 1.9 million first-time homeowners will be shut out of the market this year. The result: a significant chunk of Americans are losing out on an investment that has helped previous generations build their nest eggs.

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The challenges facing home hunters without cash reserves, such as younger buyers and historically disadvantaged groups of people, are particularly daunting. These would-be buyers are stuck with a difficult choice: compete in a hot and increasingly expensive housing market or opt for a rental, the cost of which has similarly jumped by double digits, year over year. That choice has economic implications that go beyond where to live.

“It’s likely that these issues around wealth and home equity disparities are going to be exacerbated as more folks are locked out of homeownership,” says Raheem Hanifa, a research analyst at Harvard’s Joint Center for Housing Studies.

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A wave of young home buyers has long been a staple of the bull case for housing—and, before the pandemic, the age group was finally stepping up. After a brief pause when Covid hit, home purchases took off as buyers—many untethered from their daily commutes and fueled by government stimulus, stock gains, and a newfound appreciation for backyards and home offices—flooded the market. Young buyers piled in. Millennials represented 43% of all buyers between July 2020 and June 2021, the Realtors association recently said—up from 37% the previous year.

As competition intensified, home prices jumped 10.4% in 2020 and 18.8% in 2021—the biggest annual gain in at least 34 years, according to Case-Shiller. In some markets, prices rose much faster—33% in Phoenix and 29% in Tampa in 2021, for example.

For much of the pandemic, the double-digit rise in prices was offset by low mortgage rates and climbing household income. Homes in 2020 were at their most affordable point since 2013, according to the Realtor association’s housing affordability index.

Then mortgage rates began to rise. In tandem with home price increases, the worsening environment for buying a home sent the association’s measure of first-time buyer affordability to its lowest point since 2018 in the fourth quarter—and that was before the rate for a 30-year home loan jumped above 4% in March.

The rate on a 30-year fixed mortgage hit its highest point since late 2018 last month due, in part, to the Federal Reserve’s campaign to tamp down inflation. The increase has added about $250 to the monthly payment on a $350,000 home since the end of 2021, according to a Realtor.com mortgage calculator.

While rates are still relatively low historically, the increase, coupled with higher home prices, is likely to further worsen affordability. The Realtor association’s measure of home affordability by March will be at least 25% lower than it was the previous year, Bank of America economists forecast in mid-March.

“The hurdle from home prices and affording the down payment is the worst on record, tilting the equation toward renting,” they wrote.

Lawrence Yun, chief economist of the Realtors’ group, says that the average rate on a 30-year fixed mortgage could go as high as 5% for the rest of the year. At that rate, the same home would cost a buyer $300 more a month than it did at the end of 2021.

Making matters worse for those left behind, rising wages aren’t keeping up with higher costs. In the fourth quarter of 2021, the median family spent 16.9% of its income on mortgage payments, up from 14.7% a year earlier, the Realtors group found.

Between February 2019 and February 2022, the median asking price for a home advanced twice as fast as median income did, according to a Realtor.com analysis of income and listing data in 300 of the nation’s metropolitan areas. ,Barron’s and the company that operates Realtor.com are both owned by News Corp.) Overall, home-price growth outpaced income growth in 82% of markets.

Meanwhile, the number of homes for sale has plunged. While listings fell by an average 70% across all price points, the dearth is most extreme among lower-priced homes. Nationally, the number of listings below $500,000 was 74% lower in February 2022 than in the same month in 2019, according to the Realtors Association analysis.

These factors have cut into home affordability. In two-thirds of the metropolitan areas evaluated, the share of homes affordable to middle-income buyers declined below prepandemic levels. In some markets, this measure has fallen sharply, despite greater-than-average wage gains. In Austin, only 6% of homes are affordable to the median household; in 2019, that share was 26%. That’s despite a 16.7% estimated increase in median income, according to Realtor.com, citing estimates from a Claritas analysis of census data.

(Some places, however, including Minneapolis, Baltimore, Louisville, and Chicago, saw an increase in affordability, as median incomes rose more quickly than home prices.)

Changes in affordability are based on listing prices and don’t take into account the impact of bidding wars, which real estate brokerage Redfin reported rose to a record in February. The average home sold that month received five offers, with nearly half of all buyers bidding above the list price, according to a Realtors’ association survey.

“It’s just too hard to compete against cash buyers and investors,” says Todd Luong, a listing agent with Dallas-based Re/Max DFW Associates. “I’ve got first-time home buyers that have given up.”

In particularly hot markets, to successfully buy a house or condo could mean some combination of outbidding competitors, making offers before even visiting the home, paying in cash, or waiving inspection or financing contingencies.

Stofko, the Atlanta renter, said she and her fiancé made above-asked-price bids on several homes, “waiving every contingency possible, except for giving them our firstborn child.” The competition from buyers with more money was tough, Stofko says, adding that the couple offered as much as $45,000 above the asking price on a home—and still lost out to other bidders.

In Facebook groups and on Reddit boards for localities across the country, residents complain that rent and home costs have gotten too high. Internet searches for phrases like “rent increase,” and “affordable houses” hit new highs in March, according to Google Trends. Meanwhile, the share of who told Fannie Mae that now is a good time to buy have remained near a record low.

“An existing homeowner, you can argue, is playing with house money,” says Peter Boockvar, chief investment officer at New Jersey-based financial planning and wealth management firm Bleakley Advisory Group. “That first-time buyer doesn’t have that equity appreciation that an existing buyer has.”

Rising mortgage rates on top of sustained home price gains mean that home affordability will likely worsen before it gets better. That means further setbacks for buyers attempting to enter the housing market.

Homeownership is a key component of wealth, making up about 30% of the average homeowner’s net worth—with home equity contributing a greater-than-average share to the net worth of Black and Latino households, and middle- and low-income households.

While some younger buyers have been able to secure a home, others have had no choice but to rent.

Benjamin Keys, a professor of real estate at the University of Pennsylvania’s…

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Credit: www.marketwatch.com /

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