Inflation Is Slowing, but Homebuyers Are Still Paying the Price [CNET]

Mortgage rates aren’t the only obstacle to homeownership.

Mortgage rates aren’t the only obstacle to homeownership.

Key survey findings

• A recent CNET survey found that 36% of US adults identify inflation as a primary obstacle to pursuing homeownership in recent years. 
• One-third (33%) of US adults say saving a big enough down payment would play a major role in their decision to purchase a home.
• More than three in ten (31%) say getting a raise or higher wages would enable them to consider homebuying. 

For many US households, financial stability and generational wealth hinge on the ability to purchase a home. Today’s inaccessible housing market makes that difficult. 

A CNET survey found that one-third of US adults say saving for a big enough down payment would factor into their decision to purchase homes. The high cost of living has left low- and middle-income families without room in their budgets: Some 36% cite inflation as one of the primary obstacles to homeownership over the past two years.

“Many Americans are struggling to cover basic necessities like medical care and food, let alone save for a major purchase like a home,” said Gene Ludwig, former comptroller of the currency and founder of the Ludwig Institute for Shared Economic Prosperity.

It’s a stark reminder that interest rate cuts alone won’t unlock the housing market for everyone. 

“Lower mortgage rates help, but it’s only one part of the equation,” said Doug McCoy, director of the Center on Real Estate Studies at Indiana University Kelley School of Business. 

Today’s housing affordability crisis is a product of multiple factors, such as elevated borrowing costs, rising prices and limited inventory. Those obstacles are made worse by the high cost of consumer goods and services, limited wage growth and debt — all of which eat away at the ability to save money.

Inflation is improving, but it doesn’t feel that way

According to the Consumer Price Index, which measures inflation, price growth is easing. Yet even if things look rosier on paper, headline inflation numbers only paint a broad picture of the economy. Every household has different spending needs and mandatory expenses. 

Economically disadvantaged households generally experience a higher rate of inflation than the rest of the population. Working-class households also tend to spend more on necessities like food, gas and housing — all categories with above-average inflation rates.

For example, Ludwig notes that data from his organization LISEP, which measures the true living costs for lower-income families, shows inflation on essential items rising 1.3 times faster than the overall CPI since 2001. The CPI shows housing increasing by more than 54% over the last two decades, but LISEP calculates that housing costs increased by 149% between 2001 and 2022. 

“Not only has this trend persisted but it has intensified,” said Ludwig. Preliminary calculations show housing costs increasing by 11.5% in 2023 and 10.4% in 2024.

Wages aren’t keeping up with home prices

Meanwhile, wages have not kept pace with the surge in home prices. More than three in ten (31%) US adults in CNET Money’s survey say getting a raise or higher wages would enable them to consider homebuying. 

In 2023, the median household income was $80,610, compared with $70,020 in 2000, which is an increase of roughly 15%. Compare that with the 145% increase in home prices over the same period.

The effects of wage growth aren’t equal either. Many experts agree that nationally aggregated data doesn’t accurately reflect which areas, populations and industries are more negatively affected by stagnant wages. The metrics also don’t always factor in how wealth is distributed across US households. Over the past four decades, the average income for the richest 1% of Americans increased 17 times as fast as the income of the bottom 20%, according to the Congressional Budget Office.

Rising prices only add to down payment costs 

Surging home prices also mean your savings targets for a down payment keep moving further away. 

In August, the median home price was $433,229, according to Redfin. To make a 20% down payment, prospective buyers would need to come up with $86,645 (and that’s before closing costs), which is above the median annual household income.

Homebuyers today need to earn more than $100,000 to afford the mortgage payments on a median-priced US home. With wages up by only 4.6% in August, the average earner is unable to save enough money to buy a house based on their income alone. 

Expert advice on saving for a down payment in a difficult economy

Most low- and middle-income households have limited room for spending on nonessentials when the bulk of household income already goes toward covering necessities, like housing and food. There are ways to make saving for a down payment easier.  

• Take advantage of high yields on savings accounts and CDs: Compared to traditional savings accounts, which often offer returns of less than 1% on your money, high-yield savings accounts and certificates of deposit help your money grow faster. Some of the best APYs are close to 5% right now. Even though the Federal Reserve is lowering interest rates (which means rates on high-yield savings options will also decline), you can still earn a significantly better return with these options

• Automate your savings: If you struggle to consistently save money, consider setting up automatic deposits into a dedicated savings account. You can schedule them based on when you get paid or on a more frequent basis if you have the flexibility in your budget. It keeps you accountable without adding more of a mental load. And you can always pause the automatic transfers if you’re in need of extra cash. 

• Grow your income: If you want to speed up the saving process, finding ways to increase your income will have a bigger impact than simply cutting back on expenses. Consider pursuing a well-paid and low-stress side hustle, like walking dogs or driving for a ride-share app. 

• Don’t focus on a 20% down payment: Saving up enough money for a 20% down payment is hard, especially given home prices. But 20% is not required and most people don’t put that much down. Many loans require as little as 3% to 3.5% for your down payment, which lowers the barrier to entry. That being said, aiming for a larger down payment (even if it’s less than 20%) will allow you to take out a smaller loan and save money over time.

• Explore first-time homebuyer programs: Almost every state offers first-time home homebuyer programs, with most featuring some type of down payment assistance (either in the form of a grant or interest-free loan).

The bottom line

High inflation continues to materially impact consumer budgets and the ability to save for home purchases. Lower mortgage rates are certainly positive. But to fundamentally change the affordability equation in the housing market, we also need higher wages (and not just for certain parts of the population), stable home prices and more housing supply.