The Federal Reserve decided at its June meeting not to move the federal funds rate, after a long string of interest rate hikes. But for many young people struggling to buy their first home in this high-rate environment, the Fed’s decision doesn’t help much.
My wife and I bought our first home in 2017 when we were just 21 years old. It wasn’t easy for us to get qualified for a mortgage back then, but given the rampant inflation over the past few years, it’s even harder for young people today.
Though the inflation rate has been slowing down, 4.0% is still double the Federal Reserve’s 2% target. And it has been far above that target for more than two years.
Prolonged inflation affects everyone, but it especially hurts young people trying to buy homes.
When it comes to buying a house, folks in their early 20s start at a disadvantage. They typically have very little work experience, and as such have not yet maximized their earning potential. This was certainly the case for us. I was a part-time bank teller and grocery store cashier making a little more than $8 an hour, while my wife was a full-time assistant manager at a shoe store making $9 an hour.
But even at these comparatively low wages, we were able to pay for our college tuition and our other expenses. With food inflation at a mere 1.6% in 2017 and gas averaging $2.47 a gallon, we didn’t have to worry about our raises being eaten up by increased grocery bills or fuel prices like today’s kids do.
As grocery bills soar, down payment savings shrink
Higher prices for grocery items are swallowing up a bigger portion of the income of potential homeowners, leaving them without the savings they need for a down payment and closing costs. Despite a recent increase in real wages in late 2022, data compiled by the Private Enterprise Research Center at Texas A&M University shows that the purchasing power of wages remains 3.5% lower than it was in January 2021.
A reduction in real wages has led to a decline in savings. Because most mortgage programs require some sort of minimum down payment (typically between 3.5% to 5%), young couples are struggling to save enough money to cover it. Worse, housing prices continue to rise, putting the requisite down payment even further out of reach.
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In early 2020, the average American home sold for $383,000, so a buyer would’ve needed at least $13,405 for a down payment. Now, the average home is selling for a whopping $516,500, meaning that a buyer needs more like $18,000 down.
Part of the reason home prices are increasing is because the supply of available housing is low. Before the pandemic, there were about 927,000 homes listed for sale on Realtor.com. Today, that number is nearly 40% lower.
Low housing supply has been a problem for a while, as local governments often make it very difficult for builders to construct new dwellings. But some of the blame for the recent inventory decline lies with the Federal Reserve.
For young couples, buying homes may have to wait
In 2020, expecting the economy to tank following the onset of the COVID-19 pandemic, the Fed dramatically lowered rates in order to stimulate economic activity. This created an environment where homeowners could refinance their mortgages at historically low interest rates, sometimes below 3% for a 30-year mortgage.
Simultaneously, the federal government kept pumping trillions of dollars into the economy, boosting demand and fueling inflation – including home price inflation. The combination meant doom for first-time buyers.
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Homeowners who are locked in at these super low rates aren’t moving any time soon; they’d have to sacrifice their 3% loan for one that could be 6-7% today. And with so many potential sellers hesitant to list their houses, the law of supply and demand takes over, causing prices for listings to shoot even higher.
In an effort to slow down demand and thus tamp down on inflation, the Fed began raising the federal funds rate in March of 2022. This led to an increase in loan rates across the board, including home loan rates.
Today, average mortgage rates are their highest in 15 years, pricing many younger people – who typically have lower incomes – out of the market.
Though there are some policies that governments could take to lower housing prices – such as reducing regulations that increase construction costs – some of the effects of inflation must simply run their course.
For young couples dreaming of buying their first home, that dream may have to wait.
Tyler Curtis is a contributor at Young Voices. He received a bachelor’s degree in economics from Missouri S&T and now works as a loan officer at a Missouri bank. Follow him on Twitter:@tylercurtis42
