Why Is Housing So Expensive? Becoming a Homeowner in Today’s Market

February 19, 2024 - 5 min read

The challenge of first-time homeownership

You’ve made the decision to buy your first home.

You’ve worked hard to save your down payment. You’re looking at pictures of different houses and your excitement grows, as you can literally visualize yourself turning this dream into a reality.

Fully pre-approved and ready for the fun part of shopping for a home, you choose your real estate agent. As you scroll through some of the listings available in your price range, reality sets it.

These aren’t the homes you’ve dreamt about every night for the past six months. These aren’t even close. The homes you’ve pictured are how much??

It’s natural to feel a bit taken aback by the prices, especially when they seem a world away from the homes you’ve been dreaming of.

And while today’s housing market may present challenges, it’s also full of opportunities for those who are determined and resourceful. Don’t let temporary discouragement overshadow your excitement and determination.

So, why is housing so expensive? Read on as we explore the reasons behind the cost of housing.

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Historical home values

Before we delve into why the housing market is so expensive, let’s look at home prices over time. After plateauing between 2017 and 2019, home prices in the U.S. saw a significant increase in 2021 and 2022. By mid-2023, median home prices hit $419,000. That’s a 44% increase since January 2020.

When you add rapidly rising mortgage rates to the equation, many homebuyers that attempted to enter the housing market in the past year have gotten hit with a harsh reality check.

When adding the cost of current home prices to the rising costs of nearly everything, such as food and healthcare, affordability has become nearly, if not entirely, out-of-reach for many Americans.

Why is housing so expensive? Understanding the factors that drive up home prices

Still wondering why housing is so expensive? We’ve had a near-perfect storm for higher prices and reduced affordability.

Limited housing inventory

The law of supply and demand has been in full effect. Many people want to purchase a home, but there simply aren’t enough homes on the market. The pandemic, inflation and rising mortgage rates have all worsened the shortage.

Millennials are driving up demand because, after years of sitting on the fence, they are now entering the housing market. Investors have been buying up properties, adding to the already-stiff competition. Many baby boomers are opting to age in place, as opposed to relocating into a senior living arrangement.

Rising costs for building materials, issues with supply chains and COVID-related labor shortages have all adversely impacted housing inventory.

Many critics cite zoning laws as a significant factor, saying zoning laws have become restrictive and exclusionary, reinforced by racial and class segregation.

“Zoning has gotten more complicated and more restrictive,” said Jenny Schuetz, a senior fellow at Brookings Metro who studies urban economics and housing policy. “It’s getting harder to build… particularly in high-income areas that want to have a lot of control over development.”

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Inflation’s impact on housing prices

Inflation – the rising of prices for goods and services over time – can significantly influence home prices. As inflation increases, consumer purchasing power decreases because their money doesn’t go as far.

Inflation impacts the cost of everything from the cost of eggs to gas prices, from how much you pay for toilet paper to the amount it costs to get a haircut. For home builders, construction costs, materials and labor, inflation can add up building costs significantly.

Inflation and the housing market often have an unwelcome connection.

Mortgage interest rates and housing affordability

Mortgage rates hit a record low during the pandemic, turbocharging home sales and refinancing.

But that party ended. Today, rates are substantially higher. Homeowners went from locking in rates in the high 2’s and 3’s, to now the high 6’s and 7’s. For many homeowners, this has created the aptly named “lock-in effect”, halting many families who may have otherwise listed their home for sale.

Many sellers staying put as opposed to risking entering today’s current market for a new home has caused a cratered housing inventory.

As an example of just how significant the impact of mortgage rates is on the mortgage payment, consider this scenario: If you took out a 30-year fixed rate mortgage for $350,000 at a 3.25% rate, your principal and interest payment would be $1,563 per month. That same scenario but at a rate of 7% would mean an increase of $766 to your payment, or $2,329 per month.

How to overcome the barrier to homeownership

Now that you understand why the housing market is so expensive, here’s the good news. Even with high home prices and challenging affordability, there’s a lot of optimism ahead. Many experts are predicting this year to turn around and be a great year for both buyers and sellers.

Verify your home buying budget. Start here

If you’re looking to become a homeowner in 2024, take these factors into consideration.

  1. Prioritize savings and financial planning. Most first-time homebuyers say their biggest hurdle to owning a home is having enough for the down payment. Assume you’ll need between 3% and 5% of the purchase price. You’ll want to assume an additional 2-3% for closing costs. Start saving now by building a better budget. Cut out any unnecessary expenses. Consider your savings as a non-optional expense.
  2. Explore alternative mortgage options. Don’t get stuck on one type of mortgage loan program. You also don’t want to make the incorrect assumption that you’ll need a 20% down payment. Some mortgage loans, such as VA and USDA, require zero down payment. FHA loans have a 3.5% down payment requirement. Most states have their own unique down payment assistance programs and grants. Many cities and counties are introducing new programs that may not have been an option until recently.
  3. Be open to a different housing market. Even with housing pricing being as high as they’ve been, there are other markets that are more affordable. Recently, The Mortgage Reports published a list the top 10 housing markets for first-time buyers in 2024. Locations such as Nebraska, Michigan, and New York have budget-friendly housing options ranging from $138,000 to $260,000. It’s important to look beyond just the price of the home. Remember to research the cost of living, employment opportunities, as well as the quality of life as you consider various locations.
  4. Consider a fixer-upper. While buying a home in need of repairs isn’t for the faint of heart, there are a number of reasons to consider looking into them. Not only is it possible to find a great deal on a fixer-upper, but there’s a number of great home renovation mortgages you may qualify for. Fannie Mae, Freddie Mac, FHA and VA all have home renovation mortgage options. Some homebuyers opt to purchase their first investment property this way. Do your research, work out a budget and get your financing in order prior to jumping into any major renovation project.

You CAN become a homeowner in today’s market

Buying a home in 2024 isn’t for the timid, but it’s entirely possible. The key? Be ready to make your move.

Make sure your finances are in order. Then, shop lenders, mortgage rates and buyer down payment assistance and programs. Don’t forget the importance of getting fully pre-approved. Choose an experienced real estate agent to help you navigate listings.

Finally, be open to making some sacrifices. Buying a home this year may involve some worthwhile compromises in a few areas.

Time to make a move? Let us find the right mortgage for you

Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.
Aleksandra Kadzielawski
Reviewed By: Aleksandra Kadzielawski
The Mortgage Reports Editor
Aleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).