Greg Englesbe
Mortgage News

Inflation, Higher Mortgage Rates Add More Pressure to First-Time Home Buyers

After more than two years of record home prices in the U.S., the Fed has wasted little time this year in hiking interest rates. The 30-year fixed rate mortgage, now at 5.11%, is up from just over 3% at the start of the year as policymakers look to corral an economy that has seen sharp inflation cut into the buying power of middle- and lower-class families.

The rising mortgage rates are a major blow to aspirational home buyers, who would see their mortgage payments jump by hundreds of dollars compared to where they might have been just one or two years ago.

On top of that, there’s not yet been a considerable slowdown in home price growth. Not only do buyers have to contend with higher mortgage payments, but their down payment costs are higher due to increasing prices and an undersupplied market that has fed competition beyond a level that many first-time buyers can withstand.

As I spoke about recently on my YouTube channel, inflation has really caught up with low-wage and middle-wage earners in the U.S. Even with some improvements in wages, the higher costs of gas and food are cutting into the savings necessary to buy and maintain a home.

One of the upshots of squeezing first-time buyers out of a hot housing market is that this puts more competitive pressure on rental markets. Those who may have hoped to buy a home will now pay more to rent, a vicious cycle that further hinders their positions as buyers.

The New York Times recently highlighted some signs of a housing market cooldown that have become apparent in the first half of 2022. Real estate agents are seeing the effects of higher mortgage rates on how homes are selling and where they are ultimately priced by bidders:

Now early data and interviews across the industry suggest that many buyers have finally been exhausted by declining affordability and cutthroat competition, causing the gravity-defying pandemic housing market to start easing up.

Open houses have thinned. Online searches for homes have dropped. Homebuilders, many of whom have accrued backlogs of eager buyers, say rising mortgage rates have forced them to go deeper into those waiting lists to sell each house.

On the surface, this slowdown may appear to be just what the housing market needs to recalibrate for a more sustainable path forward.

The problem is that most buyers in 2022 are still going to face tough competition because home supply remains too low to bring prices down relative to demand.

The people dropping out of the home hunt are going to be first-time buyers who no longer have the incentive of low mortgage rates to motivate them. Unfortunately, they will not get much financial relief elsewhere because rents are going up and inflation is hitting them across consumer categories.

The Fed’s efforts to address inflation aren’t likely to saturate the housing market in the near-term in ways that will improve affordability for the largest population of buyers. There may be more homes listed in the coming months, both seasonally and because home owners want to catch the tail-end of the pandemic market, but some sellers may also be put off by the high mortgage and decide to stay put rather than attempt to buy something else.

First-time home buyers are in a predicament that’s subject to larger inflationary forces that the Fed is trying to rein in. The results for the average American consumer may not be very helpful in the interim.

Photo credit Jessica Bryant/