It's almost impossible for first-time buyers to afford a home, top analyst says

• It's virtually impossible for first-time buyers to afford a home today, says Mark Zandi of Moody's.
• The surge in house prices and mortgage rates since the pandemic is pricing them out, he says. 
• An expanded low-income housing tax credit could spur building and help buyers, Zandi suggests.

Sky-high house prices and mortgage rates have dashed many Americans' dreams of owning their own home, the chief economist of Moody's Analytics says.

Prices rose about 5% last year, and are up nearly 50% over the past four years or so, Mark Zandi said in a X post on Sunday, citing his firm's repeat sales house price index.

St. Louis Fed data shows about a 27% rise in the median US home sale price, from below $330,000 in the first half of 2020 to $418,000 in the last three months of 2023.

Meanwhile, 30-year mortgage rates have surged from historic lows of 2.5% during the pandemic to nearly 7%, Zandi noted.

Their rise is primarily due to the Federal Reserve lifting interest rates from nearly zero at the start of 2022 to more than 5% in an effort to curb inflation. Raising mortgage payments is a key aspect of how the Fed's rate hikes fight inflation, as homeowners are left with less disposable income to spend and drive up prices.

Aspiring homeowners face not paying more for goods and services, but the prospect of paying a near-record price for their property, and covering hefty monthly payments.

"For the two-thirds of Americans who own their home, the higher prices mean a massive increase in their wealth," Zandi wrote on X. "But of course, this is a massive problem for potential first-time homebuyers. Given the collapse in affordability, buying a home is not even remotely possible."

The so-called affordability crisis has been fueled by the lock-in effect, where homeowners on cheap mortgage rates don't want to lose it by selling. They've also balked at paying top dollar for their next place and taking on a far more onerous mortgage.

Stand-off

As for prospective buyers, many have been priced out and are waiting for mortgage rates to fall, as they're reluctant to settle for a worse home than they could have afforded just a few years ago. The stand-off between buyers and sellers, and a shortage of available homes, has pushed up prices while reducing transaction volumes, effectively freezing the market.

Indeed, sales volumes of existing homes slumped by 17% between February and December last year, from 4.6 million units to below 3.8 million, per the St. Louis Fed.

The US needs to create a lot more housing inventory to normalize the market and help first-time buyers get on the property ladder, Zandi said. He called for an expanded low-income housing tax credit to encourage developers to build more affordable homes.

Zandi has previously warned that several things need to happen for sales volumes to return to normal levels.

"The only way out of the box, the only way to get sales back up is mortgage rates have to come down, incomes have to continue to improve, we have to avoid a recession, and I suspect we'll have to see some house price declines at some point here," he told Yahoo Finance in November.