By Shilpa Sadhasivam
For many graduating college students setting their sights on the job market, buying a home is a distant goal, not worthy of much worry. However, with the accelerating rise of home prices and mortgage rates that show no sign of stopping, millennials will soon have difficulty in affording their first homes.
According to the S&P CoreLogic Case-Shiller Indices, home prices rose by 6.7% percent within the last year alone and have been rising continuously for the past 70 months. Certain cities like Seattle, San Francisco, and Las Vegas have seen price increases over 10% within the past year, increasing the cost of living drastically.
Currently, these increases are not felt across the spectrum of home buyers. First time home buyers face the most competition in buying a home, given the rising demand and low supply of houses at their price point. The Hill states that since 2011, homes priced over $300,000 grew from 28% to 56% of the market share. This indicates that of the all homes available on the market, over half are over-budget for the average first time home buyer. Home builders are not incentivized to build entry-level homes due to the high cost of production in respect to the homes’ low profitability once sold. This increases in home supply at the top of the buyer spectrum, rather than at the bottom where supply is lowest.
In conjunction with the limited supply is rising demand first-time buyer homes. Research from Genworth Mortgage Insurance states that home sales to first time homebuyers has grown by 40% within the past three years. This growth of new buyers is only expected to increase as more millennials come of age as one of the most populous generations since the baby boomers.
Other warning signs for impending unaffordability is the rate at which incomes are rising in respect to home prices, as well as increasing mortgage rates. Incomes have been steadily rising since the recession, albeit not anywhere close to the accelerating rate rising of home prices. This, coupled with rising mortgage rates in response to higher demand, is creating an atmosphere of both uncertainty and uncomfortability regarding the current housing market. Homes are being overvalued in major cities where bidding wars are becoming more and more frequent, often leading to offers made far above the original asking price of the home. With the squeezing of rising mortgage rates as well as home pricing, millenials buying their first homes have to consider the unaffordability of homes across the country.
Some forecasters are hoping that as mortgage rates continue to rise, the demand for houses will decline in response. Keith Gumbinger, vice president of HSH, estimates that once the 30 year mortgage rate rises past 5%, demand will start to slow as prospective homebuyers are pushed to reconsider their ability to buy a home. While this may subdue the runaway prices, this may not fully address the inevitability of the demand influx millenials will bring to the housing market. Issues regarding the unaffordability of homes for first-time buyers may become more of a focal point as more millennials come of age, and hopefully the market will correct itself for this growing concern.