Rising Home Prices and Mortgage Rates Pose Challenges for Young Homebuyers

Image Commercially Licensed from: DepositPhotos
Image Commercially Licensed from: DepositPhotos

Limited Inventory and Financial Barriers Hindering Prospective Buyers

In today’s real estate market, high home prices and mortgage rates, coupled with limited inventory, are presenting significant obstacles for young adults looking to purchase their first homes. According to recent reports from the National Association of Realtors® (NAR), these challenges are affecting prospective homebuyers across races and ethnicities.

The 2023 Experiences & Barriers of Prospective Home Buyers Across Races/Ethnicities report, conducted in partnership with Morning Consult, surveyed individuals from various backgrounds, including White, Hispanic/Latino(a), Black, and Asian communities. Additionally, NAR’s 2023 Experiences & Barriers of Prospective Home Buyers: Member Study gathered insights from Realtors® specializing in residential real estate, comparing their findings with those of the consumer study.

Jessica Lautz, NAR’s deputy chief economist and vice president of research, explained, “Home buyers face the most difficult affordability conditions in nearly 40 years due to limited inventory and rising mortgage interest rates. The impact is exacerbated among first-time buyers who are more likely to be from underrepresented segments of the population.”

According to the surveys, prospective homebuyers of Asian (27%), Hispanic (24%), Black (20%), and White (15%) backgrounds cite waiting for a drop in home prices as the main reason for not yet purchasing a home. Similarly, 15% of White respondents express that they are waiting for mortgage rates to decrease. Other market-related barriers mentioned by prospective buyers include waiting for mortgage rates to decline (18%-25% across all four groups) and a shortage of available homes within their budget (19%-24% across all four groups).

Realtors® echoed these sentiments, identifying the same top three barriers preventing buyers from purchasing homes. Insufficient housing options within buyers’ budgets (34%), waiting for mortgage rates to drop due to the affordability impact of higher prices (18%), and waiting for a decrease in home prices (9%) were the primary obstacles reported. These factors heavily influence affordability, as limited inventory drives up home prices, while higher interest rates lead to increased monthly mortgage payments.

Among the financial challenges faced by prospective homebuyers, saving for a competitive down payment is a significant hurdle (6%-9% across all four groups). In terms of the barriers preventing sufficient down payment savings, respondents from various races and ethnicities identified current rent or mortgage payments (43%-56% across all four groups) and credit card payments (38%-57% across all four groups).

Interestingly, despite these obstacles, many prospective buyers are unaware of existing down payment assistance programs. Only 8%-15% of individuals from all four groups surveyed applied for these programs, while 20%-33% considered but did not apply, and 21%-32% did not consider them at all. Additionally, a significant portion (30%-33% across all four groups) were unaware that such assistance programs even existed. Lack of awareness was cited as the primary reason for not applying to these programs (44%-58% across all four groups) among those who were aware of them.

Realtors® also reported that several issues hinder their buyers from saving for a competitive down payment, with the most common obstacles being current rent or mortgage payments (23%) and credit card balances or payments (17%). Surprisingly, only 23% of Realtors® stated that their buyers experiencing these challenges had applied for down payment assistance programs. Factors such as high income levels (30%), lack of knowledge about the programs (19%), and concerns about competitiveness in multiple-bid situations (17%) likely contribute to the low utilization of these programs.

To bridge the racial homeownership gap and make homeownership more accessible, experts emphasize the importance of educating potential buyers about down payment assistance programs, such as FHA, VA, or USDA loans. Realtors® can play a vital role in raising awareness and helping first-time buyers understand and utilize these programs.

Unfortunately, discrimination continues to be a factor in the homebuying process. Approximately 13%-16% of prospective homebuyers across different racial and ethnic groups reported facing discrimination. Among those reporting discrimination, the majority of Black (63%), Asian (60%), and Hispanic (52%) individuals attributed it to their race or ethnicity. The most common forms of discrimination mentioned were steering toward or away from specific neighborhoods (36%-51% across all four groups) and encountering more stringent requirements (32%-48% across all four groups). Alarming, however, is that a large percentage (47%-81% across all four groups) of those experiencing discrimination did not report it to a government agency or legal aid organization.

Curiously, only 1% of Realtors® surveyed reported instances of discrimination during the homebuying process, while 13% were unsure. Among those who did report discrimination, the primary reasons cited were race-based discrimination in the type of loan product offered (43%) and lack of response from lenders (29%). Of the discriminated buyers, 57% reported race-based discrimination, 29% reported discrimination based on age, and 21% reported discrimination based on familial status (including marriage or parental status). Merely 7% stated that buyers reported discrimination based on race or religion to a government agency or legal aid organization.

To combat discriminatory practices in real estate, NAR provides its members with resources such as Fairhaven, an interactive training simulation; Bias Override, an implicit bias training course; and At Home With Diversity, a certification course aimed at serving diverse consumers. NAR also advocates for robust fair housing and fair lending enforcement, as well as policies targeting the closing of homeownership gaps among different demographic groups.

The current real estate market presents significant challenges for young adults aspiring to become homeowners. Rising home prices, mortgage rates, and limited inventory pose barriers to purchasing a home, affecting prospective buyers across races and ethnicities. Financial obstacles, including saving for a competitive down payment, further compound the difficulties faced by these individuals. Educating potential buyers about down payment assistance programs and addressing discrimination are crucial steps in narrowing the racial homeownership gap and making homeownership more attainable for all.