The Obstacles to Buying a First Home

**James Egan** (0:00)
Welcome to Thoughts on the Market. I'm Jim Egan, Morgan Stanley's US. Housing Strategist and Co-Head of Securitized Products Strategy.

**Sarah Wolfe** (0:07)
And I'm Sarah Wolfe, Senior Economist and Strategist within Morgan Stanley Wealth Management.

**James Egan** (0:11)
And today, why first-time home buyers are facing a tougher path to ownership. It's Tuesday, June 23rd at 10 a.m. in New York.
Buying a first-time home has always been a big step, but for a growing number of first-time buyers today, the goal can really seem insurmountable. Mortgage rates might be down from where they were in the second half of 2023, but they're significantly higher than they were for the several years before that. Monthly payments have roughly doubled for a median-priced home, and my colleague Jay Bacow and I have talked several times on this podcast about how many homeowners feel like they're locked in to those lower rates. And they're staying put because they just don't want to give up a two- or three-handle mortgage rate for something that has a six in front of it. But Sarah, as we know, this is bigger than just first-time buyers. Now they often start the housing transaction chain, and when they can't buy, current owners may not be able to sell and trade up.
That slows turnover across the market, and it also reduces activity tied to housing, from mortgages and renovations to moving and furniture. And it can keep would-be buyers renting for longer, which adds pressure to rental demand. So how do you see this situation? Is this just another affordability squeeze, or has the housing market reset to a higher barrier to entry?

**Sarah Wolfe** (1:32)
I do think that we're on the upper bound of affordability pressures. This is about as bad as it's going to get. But as we discussed in our recent publication of The Economy Explained, unfortunately, we do think that the housing market is resetting at a structurally higher barrier to entry. There's a lot of reasons for that. The first is higher interest rates. Yes, mortgage rates are sitting around 6.5 percent, and they should come down from here, but maybe not better than 5.5 percent in an optimistic scenario. The second is demographic pressures. Remember, we have this tremendous aging population of baby boomers. All of their children are now entering their prime home buying years. There's a lot of demand for ownership.
The third and fourth ones are land regulation and permitting, which is at the state and local level really hard to change. The last one is climate risk. It's just raising insurance pricing and making it much more difficult to buy a home.
Overall, we see a world where yes, mortgage rates come down a bit, improve affordability marginally, but we think neutral and other interest rates at the longer end of the curve are going to be higher than the post financial crisis period. What we're going to see is that those forces are going to widen the divide between who can own a home and who cannot, and who gains from that wealth accumulation and who does not.

**James Egan** (2:51)
All right, so now you mention where mortgage rates are today, above that 6% rate. Rates did briefly. In February, we got below 6% before they bounced back up here.
Why did that short-lived relief matter so much?

**Sarah Wolfe** (3:07)
I think that short-lived relief showed us that moves in the mortgage rate make a difference, but things are so unaffordable that it didn't make that much of a difference.
So the dip below 6% was very exciting. It happened this past February. It was the first time that mortgage rates fell below 6% since 2022, and we saw a few things happen. First, it lowered the monthly payment for first-time home buyers from about $2,200 a month to $1,900. So it makes a bit of a difference. It lowered the share of income that goes towards monthly mortgage payments from about 26% of income to 22% from peak to trough.
So that is a notable improvement, but what we saw in the new home sales data and the existing home sales data, that it did not drive people back into the housing market. I want to turn it back to you, though, Jim, because you've actually done a lot of interesting work on this and how this change in mortgage rates has changed the monthly cost that people have to pay for a median-priced home. Can you tell us a little bit more?

**James Egan** (4:06)
Sure. So we talk about the lock-in effect a lot, and it's kind of easy to point to, well, there are a lot of people with mortgage rates that are around 3% or 3.5%, and the prevailing rates at 6%, and that's a lot higher, so they're locked in. But when we look at the actual numbers in terms of what we're asking a homeowner to do, to list their home for sale and move to another home today, pay off that existing mortgage, take out a new one, when you take into account how much higher home prices are today.