Why young buyers can’t compete in today’s market

As many of us approach college graduation, a question looms: “Will I ever be able to afford a home?” For those about to enter the workforce, the question isn’t just an unlikely hypothetical. While luxury home sales are hitting all-time highs, entry-level buyers are being locked out of the housing market due to increasing prices and a shortage of affordable housing.

A new Redfin report found that the average U.S. luxury home sold for a record $1.17 million in the fourth quarter of 2023, an 8.8% increase from the previous year. In the same period, the supply of luxury homes increased by 19.7%, while the nonluxury home supply decreased by 3%.

These numbers don’t indicate a thriving luxury market, but rather a systemic housing supply issue. With so few homes available and such high demand, properties that were once considered affordable are now considered luxury. Instead of building new homes to accommodate more buyers, we are stuck with a limited supply that is getting more expensive. This leaves young professionals with little to no entry-level housing options.

The housing market is increasingly skewed in favor of wealthy buyers — those who are less affected by economic fluctuations and have money on hand to buy up property at premium prices. “A lot of luxury buyers are coming in with cash, snapping up expensive homes,” explained Heather Mahmood, a Phoenix real estate agent, in a recent article published in Kiplinger. 

Unlike the average buyer who depends on loans and is sensitive to rate hikes, wealthy cash buyers don’t rely on financing and can skirt around high borrowing costs. In instances where they do take out mortgages, their financial standing usually allows them to negotiate better terms. Following the pandemic, high inflation forced the Federal Reserve to raise interest rates, ultimately pushing mortgage rates in 2023 to their highest point since September 2000. This created concern, particularly for postgrads who are still paying off student loans. Although the U.S. Department of Education lists 10 years as the ideal timeline for paying off student debt, the average student borrower takes closer to 20. During this time, the prospect of managing a high mortgage payment is often unachievable.

Another part of the problem is the disappearance of what was once known as the “starter home.” U.S. News & World Report defines these as “smaller, more affordable homes that help first-time buyers get their foot in the door of homeownership.” The point of these units isn’t to be something special or long-term. The objective is to provide first-time buyers with a door into the housing market, allowing them to build up the equity needed to eventually purchase a forever home. 

The decline of starter homes could be a reason for the rise in age of first-time buyers. Historically, buyers would start looking for a home in their late 20s to early 30s; today, that’s not the case. According to a 2023 report by the National Association of Realtors, the average age of first-time buyers is now 35 years old, a six year increase from 1981. Without starter homes, people are forced to save more for a down payment on a larger, more expensive property. As a result, they’re older by the time they’ve saved enough money to enter the market. In February 2023, the down payment on an average home came in at about $56,000. That’s a 25% increase from just a year prior. 

Some argue that these market trends are cyclical. They claim that high prices will eventually stabilize and entry-level buyers will have more opportunities in the future. 

While it’s common for the real estate market to experience ups and downs, current trends suggest a more permanent structural shift. Wealthy buyers and investors are continuing to price out the average buyer and this imbalance isn’t showing any signs of correcting itself. Though mortgage rates have consistently decreased over the past several months and this trend is expected to continue well into next year, it’s not enough solace for entry-level buyers. 

Lower borrowing rates won’t make up for overall high prices and low inventory. Once again, the real winners will be institutional investors and wealthy individuals who can act quickly and buy multiple properties. Falling mortgage rates give the illusion that housing is more affordable, but they actually just distract from the real issue: a lack of supply. 

There’s another argument that this high demand for houses is indicative of a healthy real estate market. But a healthy market for who? Not for the 45.5 million Americans between the ages of 25 and 34 who are being hit with outrageous prices. For existing owners and wealthy buyers, high property value is a positive, but for low-income and young buyers it’s a barrier to entry, one that is often impossible to overcome. 

Vice President Kamala Harris’ campaign has proposed a plan to build three million new rental units and homes in the next four years, which could help lower these costs for first-time buyers. Increasing supply could make a real difference in helping prices to stabilize and even decrease. 

However, many previous projects to increase affordable housing have struggled. Developers can be reluctant to take on lower-income projects. For them, building higher-end homes tends to have a higher profitability. Affordable housing jobs tend to have a lower return. To help Harris’ plan come to fruition, policymakers could implement solutions like tax breaks or more lenient zoning regulations for developers who are committed to building a certain amount of affordable homes. These incentives could allow for higher-density developments, making affordable projects feasible by helping compensate for the lower profits associated with them.

To address the disproportionate buying power of institutional investors, policies could be introduced to limit their access to single-family or entry-level homes. These investors are known for their ability to outbid individuals with all-cash offers and purchase properties in bulk, which inflates prices and limits homeownership opportunities. In some areas, their involvement has also been linked to higher eviction rates and a reduction in owner-occupied housing. A solution could be to place higher taxes or fees on investors buying these types of homes. This could help deter them from the market for starter homes — a market that should be reserved for individuals and families who are looking to buy for the first time. 

The current trajectory of the housing market is unsustainable. Young professionals and average Americans will continue to be priced out unless things change. To prevent an even wider wealth gap, policymakers need to address the issue and create more opportunities for first-time buyers. 

By encouraging development and ensuring that entry-level homes aren’t absorbed by investors, we can create a system and market that is more balanced and favors more than just the wealthy few. The future of the housing market — the future of young professionals like ourselves — depends on how well we address these issues now. 

Téa Santoro is an Opinion Analyst studying economics. She writes about how financial trends impact students’ experiences and can be reached at aristea@umich.edu.

Related articles