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The American dream of owning a home is becoming elusive for many. In fact, 32% of Americans think they’ll never be able to afford their dream home, according to a recent Bankrate survey. 

High mortgage rates, low inventory, and elevated home prices have made it much harder for many prospective buyers to find a home. Case in point: The same survey found 49% of U.S. adults believe now is a bad time to buy a home. 

Let’s examine why home affordability has gotten so much worse over the past few years. 

There are several factors that have contributed to the current housing market. Here are five reasons it’s becoming harder to afford to buy. 

1. Elevated home prices

Housing prices have skyrocketed over the past several years. In October 2020, the median home price was $313,000. Three years later, in October 2023, the median home price was $393,000, a 25.6% increase. 

The housing price market is driven by supply and demand. Over the past few years, the supply of homes has not kept pace with this increased demand. High costs have slowed the construction of new homes. This supply-demand mismatch has led to a scarcity of available homes, which has increased prices.

The housing shortage is “a key fundamental factor supporting high housing prices today despite mortgage rates jumping to 8%, the highest levels since the early 2000s,” says Ted Erhart, certified financial planner and founder of Norris Lake Retirement Planning. 

According to the National Association of Realtors, states with the most limited housing supply include California, Florida, New Jersey, New York, Pennsylvania, and Washington. 

2. High mortgage interest rates

Up until early 2022, interest rates were at record lows, and it was much more affordable to finance a mortgage, Erhart says. Since then, rates have nearly tripled, making mortgage payments increasingly unaffordable. 

Let’s say you’re buying a $400,000 home with a 20% down payment. If your mortgage rate was 3%, your total mortgage payment, including insurance and taxes, would be $1,678. 

If you buy the exact same home in December 2023, with an average interest rate of 7.66%, your total monthly payment would be $2,601.

Surging mortgage rates have exacerbated the housing shortage by essentially “trapping” people in their existing mortgages, Erhart says. 

“Most homeowners in the U.S. are probably paying under 4% on their mortgage,” he says. “Who wants to move and be stuck with 8%? The result is even [fewer] homes being listed, making the inventory problem worse.”

Many experts agree that mortgage interest rates will eventually drop. But 49% of Americans think they’ll stay high for the foreseeable future, according to the same Bankrate survey. 

3. Inflation outpacing wage growth

Stubbornly high inflation has driven up the cost of goods and services over the past few years. Prices have grown 3.2% percent between September 2022 and October 2023, according to the Consumer Price Index.

But our paychecks aren’t keeping up. Wage growth increased by only 1.2% over the same period, according to the Employment Cost Index. This disparity has made it more difficult for people to transition from renting to owning a home.

When everything costs more, it’s harder to save enough money for a down payment or meet the financial requirements of homeownership. 

4. Stricter lending requirements

Financial institutions have become more cautious when granting loans, citing economic conditions. 

“When creating a new loan, [banks] don’t want to add additional risk to their balance sheet, so they have become much stricter with underwriting standards,” says Amar Shah, certified financial planner at Client First Capital.

Lenders now require higher credit scores and larger down payments, making it harder for some to secure a mortgage. These stricter lending standards have effectively shut out many aspiring homeowners from the market.

5. Fewer concessions for buyers

In a buyer’s market, sellers would often offer to cover closing costs or make repairs as a concession to the buyer. But in today’s market, where demand outstrips supply, sellers have less incentive to offer concessions. 

With multiple buyers vying for limited housing options, concessions have become a rarity. This lack of flexibility adds to the financial burden on buyers and decreases the overall affordability of homes.

“I’ve had multiple clients this year tell me that the seller wasn’t willing to offer any help with closing costs, and some even refused to fix problems with the home found during a home inspection, causing a potential deal to fall through,” says Lamar Watson certified financial planner and founder of Dream Financial Planning LLC. 

A seller’s market can be frustrating, especially for first-time homebuyers searching for their dream home. However, there are some ways to improve your chances of success.

1. Save for a down payment

First, have a good idea of how much your dream home will cost. From there, you can create a realistic budget. Calculate the monthly payments, including taxes and insurance, using a mortgage calculator. 

Determine if that monthly payment matches your current financial situation, says Rebecca J. Conner, certified financial planner at SeedSafe Financial LLC. 

“Can you support that home payment on your current income and expenses? Once you get to a place where you can easily make the payment, then you should start saving the extra cash towards your down payment,” she says. 

Saving up to buy a home requires discipline and commitment. Evaluate your current spending habits and identify areas where you can cut back. Consider reducing discretionary expenses such as dining out, entertainment, or non-essential purchases. 

You can grow your money faster by putting it into a high-yield savings account, which earns more interest than a standard savings account. Automating your savings to this separate account can reduce the chance you’ll spend your savings. 

2. Boost your credit score

Your credit score not only determines whether you’ll qualify for a mortgage, it also affects the interest rate you’ll receive. Taking steps to boost your credit score can potentially save you thousands of dollars over the life of your mortgage.

3. Be patient

Finding the right home at the right price can take time. Patience is critical during this process. Don’t rush into a purchase because you feel pressured or anxious to own a home. 

“I’ve had a few clients lose out on homes because a competing buyer waived all contingencies, including the right to do a home inspection,” Watson says. “This might get you the home you want, but it could be much more costly in the long run.” 

Take the time to research the market and compare listings thoroughly. Consider working with a real estate agent who can help you navigate the challenges of the tight housing market. They can provide valuable insights and guidance as you search for your dream home.

Remember, the housing market is always changing, and opportunities can arise unexpectedly. Stay informed about market trends, attend open houses and be ready to act when the right opportunity presents itself. 

“Don’t try to time interest rates and wait for them to fall to try to purchase a home. If you’re waiting for 3% interest rates, you could be waiting for a long time and potentially miss out on years of home appreciation,” Watson says.

It’s best to purchase your home when it makes sense for your finances – not when the market dictates. Remember, you may be able to refinance your mortgage when interest rates drop. 

Flexibility will increase your chances of finding your dream home, even in a competitive environment.

Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.