Many middle-income Americans who don’t own homes, but hope to, are unintended casualties in the Federal Reserve’s (Fed) war on inflation.
And with each uptick in interest rates, the obstacles to their dreams become bigger and bigger, particularly for Millennials hoping to buy their first houses. That’s a problem, because home equity is most middle-class families’ biggest asset and a pillar of wealth creation.
Two decades ago, about 69% of families owned homes.
Today, it’s around 65%.
This dilemma has its roots in the 2008 Great Recession when the Fed flooded the economy with cheap money to kickstart a recovery. Interest rates were the lowest since World War II. The stock market posted double-digit annual growth rates. Housing prices blossomed. Economic life was good for most—income inequality even showed signs of narrowing.
Then the pandemic struck. Our economic lives were shuttered, if not completely shut down, as stock markets and economies worldwide collapsed. Once again, the Fed, along with the U.S. government, flooded the U.S. economy with easy money and even lower interest rates.
Homebuyers could easily find 20- to 30-year mortgages in the 3% range. The affordability index for purchasing housing was at an all-time high. A median-income family earned $77,300 in 2020 and could afford to buy a $426,000 house, according to common banking metrics. With a 20% down payment and a 3.5% 20-year mortgage, the family could spend up to $1,932 a month on the house or 30% of its annual income.
However, homes nationwide were in short supply as few houses were built during the pandemic. Since 2020, average housing prices have increased approximately 12% annually, outpacing the overall inflation surge that peaked at 9.1% in 2022. Caught off guard by the persistence of this inflation tsunami, the Fed eventually responded with rapid, aggressive interest-rate increases not seen since the 1970s and ‘80s.
First-time homebuyers who delayed buying or could not afford a house just a year or two ago now face a conundrum. That $426,400 home is now worth $588,400. The same 20-year mortgage will cost 6.5%, bringing monthly payments up to $3,224 per month. But the median-income family’s annual income has only climbed to $78,300, according to the U.S. Bureau of Economic Analysis, and using the same banking metrics, the family can now only afford a $357,000 house.
By varying counts, the United States faces a shortage of affordable homes ranging somewhere between 1.5 million and 6 million, leading two University of Michigan professors to contend that “housing inequality is the real inequality in America today.”
All of this means that middle-income Millennials and other first-time homebuyers likely will be renters much longer than they want, at the mercy of the Fed’s war on inflation.
The wealthiest Americans may be losing the most in net worth thanks to rising interest rates’ impact on stock and bond markets, but many middle-class Americans are losing their opportunity to create wealth through home ownership.
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