First-time U.S. Home Buyers Feeling 'Defeated' By Soaring Prices, Rising Rates

Brianna Lombardozzi finally has her finances to a point where she might be able to buy a house. But she isn't feeling great about her odds.

Lombardozzi, 37, used her federal stimulus checks and other savings built up during the pandemic to pay down the majority of her credit card debt - a move that helped her credit score rise by almost 100 points.

But competition is intense for homes in her price range of $175,000 to $225,000 in Central, South Carolina, and she has had four bids rejected over the past month. Now with mortgage rates rising, she doesn't know if she'll find an affordable property before her lease is up at the end of May.

"Right now, I feel a little defeated," said Lombardozzi, who works in housing for a local university.

As home prices soar, housing affordability is sinking to the lowest levels since 2008 and first-time buyers - who haven't benefited from rising home values and are also coping with rising rents - are being squeezed out.

First-time buyers accounted for 27% of existing home sales in January, according to the National Association of Realtors, near 2014 levels. With mortgage rates above 4%, around the highest in about three years, and expected to rise further, buyers on tight budgets may struggle even more to find homes they can afford.

Graphic: First-time buyers squeezed out :

AFFORDABILITY STRAINED

Demand for housing soared during the pandemic as buyers capitalized on record-low mortgage rates and remote workers sought more living space. Some people, like Lombardozzi, saved money they would have typically spent on travel or dining out while much of the economy was shut down, leaving them with more cash to potentially invest in a home.

At the same time, the number of homes for sale plunged as some owners stayed put because of uncertainty and supply-chain disruptions and labor shortages slowed new home construction.

While some imbalances are easing, the supply of homes for sale at the end of January was at a record low - only enough to last 1.6 months, NAR data shows. That is forcing buyers to compete over limited listings and pushing prices higher.

At the end of 2021, housing affordability dropped to the lowest levels since November of 2008, with households earning the median income needing to spend nearly 33% of their income to afford payments on a median-priced home, according to the Atlanta Federal Reserve. Housing is generally viewed as affordable when households spend no more than 30% of their income on shelter.

Affordability may be strained even further by rising mortgage rates. Some people who had been pre-approved for a mortgage may find they no longer qualify for the same maximum loan amount after mortgage rates rise, said Jennifer Beeston, a senior vice president of mortgage lending for Guaranteed Rate, a mortgage lender.

First-time buyers are already struggling to compete with all-cash offers, including from institutional investors such as private-equity funds, which are taking up a greater share of purchases and are viewed as less risky by sellers, analysts say. Cash purchases accounted for 27% of sales in January, up from 19% a year earlier, according NAR.

And some new buyers are being outbid by people with enough cash to pay above what a mortgage banker is willing to lend, based on the home's appraised value, said Erica Barraza, a real estate broker in the Seattle area.

Graphic: Home ownership becoming less affordable:

BRACING FOR DISAPPOINTMENT

Many prospective home buyers find they need to increase their budgets or lower their standards just to have a chance at a winning bid. They also have to move fast, viewing homes the day they go on the market and making offers within a day, or minutes after the viewing.

Those conditions are hitting morale: A survey by Fannie Mae found just 29% of respondents think it's a good time to buy a home, near a record low for a series launched in 2010. "What I spend 50% of my time doing now is pep talks," said Beeston, who works in mortgage lending.

Jason Harrison and Jamar Haggans are just getting started with their home-buying search, but they are already lowering expectations.

Their search for a three-bedroom, two-bathroom house in Kansas City, Missouri, priced under $450,000 turns up only 10 to 20 new houses daily. Many of them sell within a day or two - often well above the asking price.

After reviewing the quality of homes listed, they upped their budget by $75,000 and are nervous about over-paying.

"My biggest fear right now...is that if we want to get a home we're going to have to pay more than it's actually worth," said Harrison, 36.

Harrison and Haggans are not willing to waive home inspections or appraisals, which they worry will make them less appealing than buyers willing to make those concessions. They hope more people will list their homes in the spring.

Delaying a home search also has costs for buyers facing rising rents.

Lombardozzi, who lost at least one bid to an all-cash offer, estimates she has about a month to find a home before she needs to start looking for rentals.

The house she's been renting for six years was recently sold, and she says comparable rentals are going for 20% to 40% more than what she is paying now.

She first started searching for homes in January, and Mortgage Bankers Association data shows home-loan costs have climbed roughly three-quarters of a percentage point in that window, reducing how much she can borrow if she wants to keep the monthly mortgage payment at a level she can afford.

"By the time I might actually get an offer accepted, what will the rates have gone up to?" she said. "Will I just not be able to buy a house period?"