The American Dream of becoming a homeowner seems out of reach for many, with 70% of Americans reporting they think buying a home in 2024 is an unrealistic goal, according to an IPX study.
Mortgage rates, which surged in the post-pandemic era, are one big issue stopping people from purchasing. In fact, over half of all would-be buyers said they were waiting for interest rates to drop before moving forward.
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The good news is that the Federal Reserve recently cut rates by 0.5% in its September meeting, and more cuts are expected through 2026. Mortgage rates had already dropped from their peak in anticipation of rate cuts, and they should decline further as the Fed continues to reduce rates.
The bad news is that rate drops won’t fix all the issues making housing unaffordable. Some of those other problems will be more difficult to solve.
A housing shortage has driven up prices
You don’t need to be an economics expert to understand the laws of supply and demand. When supply is low and can’t meet demand, prices surge because people are willing to pay more to get their hands on the limited inventory.
Unfortunately, this is one of the most significant issues in the housing market. A Zillow analysis released in 2024 found that, as of 2022, the U.S. had a housing shortfall of 4.5 million homes, up from 4.3 million the year prior. Too few houses were built in the decade following the Great Recession, and strict land-use rules have made it hard for builders to build enough to catch up.
As mortgage rates fall, some experts believe buyers will flood the market, sending prices soaring and putting homes even more out of reach for many.
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Home insurance costs are also soaring
The cost of the house itself isn’t the only thing that’s rising. The nationwide calculated weighted average premium rate increase for owner-occupied homeowners insurance was 11.3% in 2023 compared with 2022, according to S&P Global Market Intelligence. It said between 2018 and 2021, the countrywide yearly average rate change ranged from 2.5% to 3.8%, but this jumped to 6.2% in 2022 and 11.3% in 2023.
Costs have continued rising into 2024, prompting a large group of national real estate and housing associations and non-profit organizations to pen a letter urging the Biden Administration and Congress to take steps to identify solutions to this crisis.
Home insurance costs are significant because they are a part of your monthly housing payment, and banks consider them in the PITI calculation, which determines if you qualify for a loan. PITI represents principal, interest, taxes, and insurance, the four costs that make up your monthly payment with most home loans.
Since banks ideally want PITI to be less than 28% of your income, pricier premiums put properties even more out of reach.
How can we fix it?
Mortgage rate cuts alone will not solve the problems of skyrocketing prices, so borrowers hoping the Federal Reserve will bring relief will likely be disappointed.
The most obvious fix would be to build more homes, thereby increasing supply. The National Association of Home Builders has a 10-point plan to encourage that, which includes eliminating “excessive” regulations, streamlining supply chains, promoting the production of affordable housing through federal tax credits, and encouraging people to work in the trades.
Lawmakers from both sides of the aisle also have a variety of proposals to address the housing affordability crisis, including opening up federal lands for housing, which has bipartisan support. Other suggestions include a down payment grant proposed by Vice President Kamala Harris, and changing permit and zoning rules, which was former President Donald Trump’s suggestion.
Sadly, none of these solutions will provide an immediate fix, so would-be homebuyers will need to do the math carefully to find out if lower mortgage rates will do enough to make buying within budget. If it’s not, continuing to save and waiting for positive change could be the only choice.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.