Rising Rates Likely Quashed Homeownership Dreams of 2.4 Million Potential First-Time Buyers

First-time homebuying plunged 22% in the past year and 40% in the fourth quarter alone as higher interest rates priced more than 2.4 million potential buyers out of the market.

Monthly payments on a median-priced home jumped to $3,000 per month from $2,500 between March 2022 and March 2023, as the rate on a 30-year fixed-rate mortgage rose to 6.5% from 4.2%, according to a report from the Joint Center for Housing Studies at Harvard University.

While rising interest rates generally helped bring down housing prices, higher rates meant that keeping up with monthly mortgage payments was more difficult, making it harder for many buyers to find a home within their price range. 

“Even though prices nationwide stopped rising because of the rise in interest rates, the monthly payments that the potential buyer would see still rose dramatically over the past year, by 20% on average,” said Daniel McCue, a senior research associate at the Joint Center for Housing Studies. “That really cut down on affordability.” 

The number of mortgages originated to first-time homebuyers dropped 22% between March 2022 and March 2023, including a year-over-year drop of almost 40% in the fourth quarter of 2022. 

“So it’s natural that there was a retraction in the number of buyers in the marketplace and I think that that created a somber environment for all of those first time homebuyers,” said Garry Reggish, a broker in Novi, Michigan and a regional vice president at the National Association of Realtors.

“It’s kind of like going into a store and you see an item that you really want, it’s on sale, and you’re excited because you can afford it,” he added. “Then you show up to the store and find out that the sale just ended yesterday, and it’s back at the normal prices.” 

Market Conditions Widen Homeownership Gap Between Black and Hispanic Homebuyers and White Homebuyers

The Harvard data found that the rising cost of homeownership disproportionately affected potential first-time homebuyers of color, who already comprised a smaller share of homeowners in the U.S. 

Black and Hispanic homeownership rates were 28.6 and 25.8 percentage points below White homeownership rates in 2022. While Black homeownership rates have increased since the pandemic began, the figure is recovering from a record-high gap in the years before the pandemic.

“Heading into the pandemic, we had been reporting that the homeownership rate gap between White households and Black households was as high as it had been, it’s something where these gaps are persistent and wide,” McCue said. “There was some evidence that Black homeownership rates rose faster than White rates since the pandemic began. It’s a good thing that these gaps are starting to narrow, but there’s a long way to go and they are narrowing from an all-time high.”

Rental Market Continues to Boom As Concerns Over Housing Costs Persist

The number of cost-burdened homeowners, those who spend more than 30% of their income on housing, increased more than any time since the housing boom of 2005-2007, according to the Harvard report. 

The high costs are continuing to push potential buyers into the rental market. Reggish said he continues to laud the possibilities of wealth creation through homeownership to potential clients,  despite the fact that it could mean spending more up front. 

“When you have a huge flux in interest rates, like what we’ve recently seen, it definitely has a tendency to stall the market for a limited time period until people start to get used to the new normal,” he said. “But I think that they would be very surprised at how much more cost-effective it would be to own that house that they’re currently renting and they can be on their path to wealth creation.” 

Still, while buying seems out of reach for some, they turn to the rental market, looking for typically higher-end developments to support their needs. Demand for high-end rentals is continuing to grow and developers are prioritizing those projects for higher profit margins. 

But the availability of affordable rentals is a crucial piece of the puzzle, according to the Harvard report. The number of cost-burdened renters reached a record high of 21.6 million households. And as developers focus on higher-end construction, the supply of low-cost rental units is waning. The market has lost 3.9 million units with contract rents below $600 in the last decade, leaving some of the most vulnerable Americans with fewer options, and fueling a 35% nationwide increase in unsheltered homelessness since 2015.