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Today’s first-time homebuyers are priced out of buying — and also renting

06 Sep
Jonathan September 6, 2022 0

As first-time homebuyers try to muscle their way into today’s highly competitive housing market, many are finding themselves priced out of buying — but renting offers little relief. 

Nationally, the median mortgage payment for mortgage applications submitted in February 2022 was $1,653, up from $1,316 a year earlier, according to the Mortgage Bankers Association (MBA). 

This $337 or 26% increase is thanks to both the intervening increase in: 

Here in California, the average low-tier home value has increased 19% from a year earlier as of January 2022. Similarly, mid-tier prices have increased 22% and high-tier prices have increased 24% over the prior 12 months. 

Mortgage interest rates have also surged in recent months. When interest rates rise, buyer purchasing power is reduced. In other words, more of a homebuyer’s mortgage payment goes toward paying interest, with less available for principal. When a homebuyer has room in their budget, this means their mortgage payment goes up. But when a homebuyer is already operating at the top of their budget, they are unable to pay as much for the same home, which ultimately puts downward pressure on home prices. 

Combined, these two factors have caused average mortgage payments to rise a significant 26% over the past year as of February 2022 — and rising. 

As purchasing a home becomes increasingly expensive, it’s easy to assume many would-be first-time homebuyers will throw in the towel and continue to rent. But rent increases have mirrored the rising cost to purchase, making both choices less than ideal. 

In fact, from the first quarter (Q1) of 2020 to Q4 2021, rents have increased at a faster pace than mortgage payments, as reported by the MBA. While mortgage payments have increased consistently over that period of time, rent increases have only recently picked up the pace. 

Here in California, the annual increase in rent as of January 2022 ranges from a “low” 9% in San Jose to 24% in Sacramento and a whopping 32% in Riverside, according to Redfin. 

Editor’s note — An alternative source of funding for homebuyers requiring a low interest rate is carryback or seller financing. The buyer is typically able to negotiate a below-market interest rate in exchange for agreeing to the seller’s higher-than-market asking price. 

Related article: 

Rising rents slash future homebuyer prospects 

First-time homebuyers are the lifeblood of the real estate industry. Without them, there is less turnover: a dim future for the long-term health of the real estate market. 

But when rents continue to increase at a pace far exceeding incomes, there is little chance of saving up for a down payment (absent a parent-funded down payment gift). 

To combat the crushing weight of rent increases in California, the Tenant Protection Act (TPA) went into effect in 2020, with the goal to: 

  • cap annual rent increases at 5% plus the rate of inflation for much of California multi-unit residential properties; and
  • require “just cause” to evict tenants in place for 12 months or more. 

However, the extraordinary rent increases of the past year make it clear: many of California’s rental properties are avoiding the rent caps. The reason comes down to a number of loopholes in the law. For example, new buildings are exempt until fifteen years after construction. Thus, newer rental units are not held back by rent caps. 

In turn, renters can’t rely on rent caps to protect them from rising rents. Likewise, there is no such thing as a legislated cap on home prices. 

The solution? Simply put, more housing is needed to meet demand from renters and homebuyers alike. 

Yet, residential construction in California has long lagged behind where it ought to be. 

California legislative efforts to add to the low- and mid-tier housing stock have focused on encouraging more multi-family construction in recent years. However, overly restrictive zoning continues to hold back growth in high-cost urban areas like San Francisco, San Jose and Los Angeles. 

Further, building material and labor shortages have slowed builders’ progress in 2021-2022. Combined, these factors will hold back residential construction starts from reaching their full potential for the next two-to-three years. 

Until construction catches up and returns to healthy levels, demand will continue to exceed both the rental and for-sale inventory. During that time, turnover will remain stunted and residents will continue to overspend on housing costs, with little leftover for future major purchases. 

Real estate professionals can get involved by attending local council meetings and sharing the need for zoning changes with other industry professionals to encourage growth in California’s most desirable areas.