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It's a seller's market and buyers are struggling.

3 minute read

With home prices rising current homeowners are looking to ditch their homes are in for a pool of cash. But those who are looking to buy need to come up with a lot of it. And they might not be able to.

Not only are home prices up right now, but there’s also a 95 percent chance they will increase by 2020, says a study from insurance company Arch Capital Services. Every state is projected to have a boost in home growth in the next two years.

“Fewer people are selling starter homes to trade up to bigger houses, and that’s a trend that will continue now that the majority of homeowners have lower mortgage rates than they could get on a new loan,” says Arch Capital Services executive Ralph DeFranco. “With fewer new starter homes, the most likely scenario is continued [with] rapid price growth of existing homes.”

Did the Great Recession hurt our homebuying chances?

Millennials are becoming the biggest group of homebuyers. They want to buy, but they just might not be able to afford the scraps left behind by more wealthy, interested buyers. There simply isn’t enough supply to meet the demand.

Previously, homeownership rates were higher than the desire to buy, according to insurance company First American Financial Corporation.

First American Chief Economist Mark Fleming says in the early 2000s, buying a home was simple: potential homeowners had an easier time getting credit, which meant those with less-than-stellar scores could buy a home. It was great for new homeowners but terrible for lenders since financially irresponsible people were getting mortgages. As Americans owed more than they could afford, the housing bubble burst in 2008. And then the Great Recession started.

“Speculation, easy access to credit, and exuberance during the housing boom spurred the homeownership rate to record highs,” Fleming says. “As the housing market turned in 2008, the homeownership rate exceeded potential homeownership demand, with the gap reaching almost 9 percent at its peak in 2010.”

Homebuying is (still) a major adult milestone

With the recession long behind us, young people are looking to buy homes now more than ever. Most millennials believe buying a home equals adulthood. But they’re finding out just how tough adulthood is. With home prices rising their prospects are looking thin.

“While important lifestyle decisions, such as marriage or owning a home, appear to take place later in life for millennials, they are getting educated in unprecedented numbers,” Fleming says. “As educational attainment levels increase, we can expect homeownership rates to eventually grow, as well.”

For a while, Americans were hesitant about buying homes. Those who would be getting mortgages — or millennials — didn’t want to add to their already swollen debt load from student loans. This — tacked onto a less affordable market — made homeownership drop from the American dream pedestal. But it looks like it’s back. As more young people believe owning a home is an essential part of becoming an adult.

With home prices rising it’s shutting out a lot of would-be buyers

Since demand is so high, homeownership is now left to those who can not only afford it but have cash on hand to pay more than the next person.

Home price inequality is rampant in middle America, a study from LendingTree found. Detroit, Birmingham, Ala., and Indianapolis all have the highest home price inequality in the nation. That means with home prices rising residents of these cities can’t afford to live there.

Being priced out of a city is nothing new, but we’re used to seeing it in major coastal cities, like New York and San Francisco. And it’s true that homeownership is nearly impossible in the Bay area, where 3 in 4 San Francisco residents can’t afford to buy homes there.

And it’s also true that cheap homes are selling, but the people who are buying them aren’t the same people they are being built for. Cheaper homes gained a lot of value, which means low-income families were priced out. LendingTree says the Midwest has the highest rate of home price inequality.

Homes out west are equal but exorbitant

“High home prices don’t necessarily mean high inequality,” LendingTree says. The San Jose and San Francisco metro areas were nearly last for home inequality. Which means they’re really expensive but residents earn enough to be able to still live there.

In San Jose, incomes are high and mortgages rates are low. Mark Fleming from First American Financial Corporation says the higher the household income, the higher the buying power.

“Unsurprisingly, the top five cities coincide with the five cities with the highest household income – make more (money) to buy more (house),” Fleming says.

The top 5 cities are:

  1. San Jose, CA: $660,884
  2. Washington, D.C.: $633,093
  3. San Francisco, CA: $583,496
  4. Boston, MA: $509,520
  5. Seattle, WA: $486,574

No state had a year-over-year decrease, according to the study.

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About the Author

Dori Zinn

Dori Zinn

Zinn is a freelance journalist based in Fort Lauderdale, Florida.

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