Homeownership has long been a cornerstone of the American dream. But with prices and mortgage rates high, first-time buyers are struggling to achieve it. Also, scores of existing homeowners are realizing they can’t afford to move.
All of this begs the question: Can the middle class still achieve the American dream, or is the dream now reserved for those in higher tax brackets?
“In the past, if you were middle class, it was almost assumed you would become a homeowner,” says Ali Wolf, chief economist of the building consultancy Zonda. “Today, the aspiration is still there, but it is a lot more difficult. You have to be wealthy or lucky.”
The median household income was $74,580 in 2022, according to U.S. Census Bureau data. But that income might not be high enough to afford a home when the median list price was $410,000 in December, according to the most recent Realtor.com® data. (Households are all of the people who live in the same home, such as singles, couples, families, and roommates.)
The rule of thumb is buyers shouldn’t spend more than 28% of their income before taxes on housing. This includes their mortgage principal, interest, property taxes, and home insurance. Using that math, the typical U.S. household could afford a $270,000 home if they put 10% down and had little to no debt.
That price is about 34% less than what the typical home costs.
“It’s challenging,” says Realtor.com Chief Economist Danielle Hale. “Affordability today is not the worst it’s ever been, but it’s not much better.”
What buyers might forget is that it’s never exactly been easy to buy a home. Mortgage rates recently hovering around the mid-6% mark might seem high compared with just a few years ago, when buyers could snag a loan in the 2% or 3% range. But these rates are lower than what they were for much of the 1990s, when they ran the gamut from mid-6% to more than 10%, according to Freddie Mac data.
And if you look back even further to October 1981, rates peaked in the mid-18% range.
However, the typical existing home cost only a median of $66,000 at that time, according to the National Association of Realtors® data. Home prices have since shot up by nearly 500%. Meanwhile, the median household income has increased only by about 300% over the same time frame, according to U.S. Census Bureau data.
“The typical family in today’s market cannot afford the typical home,” says Yelena Maleyev, a senior economist at KPMG. “It will take a combination of lower mortgage rates and lower home prices and more [housing] supply to help the typical family afford the typical home.”
What middle-class homebuyers need to succeed
Whether middle-class buyers can make it work or not will depend largely on where they live, what their finances look like, and whether they receive help from the bank of Mom and Dad.
For instance, it’s going to be a lot more difficult to purchase a home in San Francisco, where the median list price was $1.2 million in December, than in Detroit, where it was just $85,000.
Similarly, a middle-class couple with higher incomes and no debt or car payments receiving down payment help from family members to purchase a one-bedroom condo in a lower-priced, Midwestern metropolitan area might be able to do it. But a family of five juggling credit card and student loan debt and high child care costs as they look for a four-bedroom house in a pricey part of the country might struggle to be approved for a mortgage.
“It depends on what specific kind of house you need, how much debt you have, and what your family looks like,” saysJacob Channel, senior economist at LendingTree. “There will be buying opportunities for a lot of people, but certainly not everyone.”
Why first-time buyers have it especially hard
First-time buyers have been hit hardest by higher home prices and mortgage rates, as they don’t have any equity from a prior home to roll into the purchase of a new one. These buyers also tend to be younger, so they might be earlier in their careers when they don’t make as much money yet. And they might also be hurting from higher rental prices on top of making student loan and car payments.
The result? They might have smaller down payments and less money to spend on a home. They’re also competing with all-cash offers from investors and homeowners selling their homes in pricey areas and using the money they make to buy in cheaper areas.
Not surprisingly, successful first-time buyers generally tend to have higher incomes. They had a $95,900 median household income last year—about 35% higher than in the previous year, according to NAR data.
First-time buyers without high salaries have been able to do it with financial help from their families.Some buyers have been tapping into their inheritances, with their parents’ blessing, for money to put toward a home.
“If you’re buying off of your income, it’s a really tough market to purchase a home in,” says Wolf. “If you’re converting from renting to owning, it’s extremely difficult.”
Why many homeowners feel trapped
Even middle-class homeowners aren’t immune to the tough market conditions. Many have locked in mortgages at ultralow rates, under 3% in some cases. If they decide to sell their properties to purchase new ones with a mortgage, they have to contend with higher prices and rates. This means they could be facing larger monthly mortgage payments.
That’s effectively trapped many of them in homes they may have outgrown.
Homeowners can trade up, but it might require significant planning or life changes. For instance, homeowners with low-rate mortgages might manage to set money aside for their next home purchase. Or they might get promoted or switch to a higher-paying job, or transition from a single- to dual-income household.
Plus, many longtime homeowners have built up significant equity. That money can be used to help cover their next purchase, especially if they’re downsizing or moving from a pricey area to a more affordable one.
“The one positive right now is homeowners have record levels of equity in their home,” says Lisa Sturtevant, chief economist of the Bright MLS, which covers the mid-Atlantic region. “The challenge is taking a higher mortgage rate, which a lot of people don’t want to do.”
The consequences of putting off homeownership
Homeownership has long been used by Americans to build wealth, launching many into the middle class. Putting off homeownership could have financial consequences.
“The longer the market remains this unaffordable, the longer it takes these younger households to break into the market,” says Hale. “Delaying homeownership delays building wealth. The later they start on their mortgage, the longer it will take for them to pay it off.”
This could affect the ability of many to save adequately for retirement, pay college tuition, and have the resources to cover a large, unexpected expense.
The good news for buyers is mortgage rates have come down since this fall, when they briefly flirted with 8%. Builders are also attempting to ramp up construction of smaller, more affordable homes. Those extra homes could help to keep a lid on prices.
The American dream is “not a dream that’s deferred, it’s delayed,” says Odeta Kushi, deputy chief economist at First American Financial. “We will come to a point where there’s more homes on the market and rates will come down from recent peaks, which should help affordability.”
