‘Almost impossible’: Janet Yellen despairs at housing market’s one-two punch for first-time buyers

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It’s official: Home prices are up nearly 5% year-over-year in every major U.S. city, according to a Redfin report released Thursday. Meanwhile, current mortgage rates are nearing the 8% peak from fall 2023. That deadly combination is making it “almost impossible” for first-time home buyers to break into the U.S. housing market, Treasury Secretary Janet Yellen said during her testimony before the House Ways and Means Committee on Tuesday. 

“With house prices having gone up, and now with much higher interest and mortgage rates, it’s almost impossible for first-time buyers,” Yellen said.

Yellen also cited the lock-in effect as a major obstacle for new buyers. The phenomenon is when current homeowners are reluctant to sell their home out of fear of losing their low mortgage rates, only to trade them for high rates and higher home prices. A pair of housing tax credits proposed by President Joe Biden, however, could potentially help ease the lock-in effect. 

One tax credit would provide $10,000 for first-time home buyers, while a separate $10,000 tax credit would benefit homeowners in selling their “starter home” to move into a larger house. The hope would be this particular tax credit would increase starter home supply, which is extremely low as more current homeowners hold onto their current properties. However, with home prices reaching a near-record $383,188 at median, according to Redfin, many buyers are still excluded.

“We know that affordable housing and starter homes are an area where we really need to do a lot to increase availability,” Yellen said during her testimony. 

Why it’s so hard for first-time home buyers to find an affordable house

There are several factors working against first-time home buyers in today’s housing market. Rising home prices in conjunction with rising mortgage rates have driven the median monthly housing payment to a record $2,890—a whopping 15% year-over-year increase, the Redfin report shows.

U.S. Bureau of Labor Statistics data shows the median weekly earnings for full-time workers as of the fourth quarter of 2023 was $1,403. Assuming the median monthly housing payment, that means homeowners would be spending half of their income each month on that expense alone. It’s typically recommended that renters and homeowners shouldn’t spend more than 30% of their income on housing—and anything more than that could make them effectively house poor.

Spending more than 30% of one’s income on housing is “generally considered a high burden, and one reason why, in our estimation, affordability is at a 30-year low,” Mark Fleming, chief economist at Fortune 500 financial services company First American, previously told Fortune. “The combination of higher rates and continued price appreciation has made affordability a real challenge for first-time homebuyers.”

Considering higher home prices, it’s also been increasingly difficult for first-time home buyers to come up with enough cash for a down payment, even on a starter home. Some first-time home buyers have gotten so desperate to come up with cash that two in five Gen Zers and millennials are working side hustles to save for down payments, according to another Redfin study. Other first-time home buyers have even opted to ask for down payment cash on their wedding registries.

Assuming the value of a median-priced home in the U.S. of about $383,000 and the standard 20% down payment, a couple would need to come up with an eye-popping $76,000 up front, which just simply isn’t doable for many Americans. 

“This is a lot of cash and can be very intimidating for young couples looking to buy their first home,” Amanda Pendleton, a personal finance expert at Zillow Home Loans, previously told Fortune. While it’s possible for some first-time home buyers to put a lower percentage down, that can be a lose-lose situation in the end. 

“The less money you put down, the higher your monthly mortgage payment will be,” Pendleton said.

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