The U.S. housing market is currently grappling with the twin pressures of rising mortgage rates and skyrocketing home prices, leaving many potential buyers feeling priced out and frustrated. The situation has created a cyclical dilemma, preventing both new purchases and moves by existing homeowners, as they cling to lower rates secured during earlier periods.
According to recent data from the Greater Milwaukee Association of Realtors, the median home price in the Milwaukee area has surged to $349,834 as of October 2024, marking a staggering 12.8% increase from the $310,000 figure just one year prior. This trend reflects elements seen across various markets nationwide as affordability becomes increasingly elusive.
At the same time, mortgage rates have risen sharply. Following the Federal Reserve's interest rate cuts starting September 2024, there was initially some relief, with the average rate on 30-year fixed mortgages dipping slightly. Yet optimism was short-lived as rates abruptly shot back up to 6.79% last week, according to mortgage purchasing giant Freddie Mac.
With these rising costs, many working-class individuals and families are now finding themselves on the wrong side of the affordability line. Marquette University researchers published findings indicating how stark this change is; previously, factory supervisors earning $63,000 could readily afford homes within the market. Fast-forward to 2023, and the same home now requires the salary of someone earning upwards of $100,000—a stark reality check for many.
Experts warn this scenario isn’t unique to Milwaukee. Across the country, home prices, and by extension mortgage costs, have crept upward due to various factors, including significant shortages of new single-family homes and condos.
Still, it isn't all gloom and doom. Experts forecast some potential for relief, particularly by 2025, as many anticipate mortgage rates may settle around 6%. This is bolstered by data showing promising increases in home-building permits, with Milwaukee County seeing permits for single-family homes jump by 132.1% so far this year.
Even more eye-opening is how mortgage interest rates deviate from the Federal Reserve's actions. Despite the Fed's recent cuts, the broader bond market—especially the yields of 10-year Treasury bonds, which significantly inform consumer mortgage rates—has seen investors pushing rates higher. For example, even as the Fed works to lower rates through monetary policy, expectations around future inflation and government debt have led to upward pressure on yields. According to analysts, elevated mortgage rates can remain “higher for longer” due to economic and political uncertainties.
With homeownership slipping out of reach, many people face the challenge of not only affording new homes but also feeling trapped where they currently live. A report showed nearly half of American homeowners under age 50 express feeling trapped, unwilling to sell their homes and lose the low mortgage rates they secured previously. Many mortgages taken out pre-2022 offered rates under 3%—historically low rates many simply cannot bear to lose.
This trend has resulted in homes selling at declining rates, particularly for first-time buyers who represented just 24% of all purchases between July 2023 and June 2024—a record low not seen since 1981. During healthy markets prior to 2008, this demographic made up closer to 40% of home purchases.
Looking down the road, the impending spring home-buying season, traditionally the busiest time for the real estate market, could be especially hard on first-time buyers. With anticipated continued high mortgage rates and prices, analysts predict new homebuyers may face the stiffest affordability challenges, particularly if potential sellers hesitate to enter the market and forgo their existing lower rates for new higher ones.
Analysts caution against relying only on the promise of reduced rates, noting sweeping changes at the government level due to fluctuated economic policies could lead to unpredictable mortgage rates moving forward. The recent presidential election has sparked discussions around potential new economic policies under the incoming Administration, which promises to tackle rising inflation yet is also perceived to potentially lead to increased government debt, thereby pressuring interest rates higher.
Although predictions could fluctuate wildly based on political outcomes and other external influences, current economic theories suggest mortgage rates could hover between 5.5-6.5% moving forward, with some market watchers estimating they may not dip below 6% without the specter of economic downturn pulling them down.
The inability of many Americans to buy homes not only stifles individual wealth growth but also contributes to broader economic issues. House equity growth over time has historically been one of the strongest contributors to wealth accumulation, and with many sidelined from potential homeownership gains, there are marked concerns about intergenerational wealth effects.
On the ground, would-be sellers preserve their decades-low purchase rates, locking themselves and the market alike in place. Many buyers remain hopeful new inventory and relief on rates might come, yet sentiments reflect caution, as they navigate the complex economic territory of high prices and destabilizing interest rates. The bonds between the financial market, monetary policy, and individual fortunes have rarely been so tightly wound and precarious.
