Home prices are high and so are interest rates, but that hasn’t stopped Americans from buying their first home.
Zillow's 2023 Consumer Housing Trends Report found that in 2023 half of all home buyers are purchasing their first home, the highest share that Zillow has ever recorded. That’s an increase from 45% last year and a meaningful jump from 37% in 2021.
Zillow says the share of first-time buyers probably hasn't been this high since 2010 when there was a first-time home buyer tax credit.
The percentage of first-time buyers has increased, in large part because people who already own homes aren’t selling and buying new homes. In many cases, existing homeowners have a mortgage rate well below 5% and aren’t willing to trade it in for an interest rate north of 7%.
Factors depressing sales
That’s where mortgage rates are right now, with some housing economists expecting the average 30-year fixed-rate mortgage to hit 8% in the coming weeks.
"High mortgage rates and a shortage of inventory keep would-be repeat buyers in their current homes," said Zillow’s senior population scientist Manny Garcia. "A greater relative share of first-time buyers is filling the gap, and they're competing against each other for the limited number of affordable starter homes on the market."
Because of rising mortgage rates, first-time buyers are able to afford to pay less for a home, at a time when average home prices are rising once again. A new report from real estate brokerage Redfin estimates buyers have lost tens of thousands in purchasing power since 2022.
The report uses the example of a buyer with a total budget of $3,000 a month. With the mortgage rate at 7.4%, that buyer could afford to pay $429,000 for a home.
A loss of $71,000
However, a year ago the same buyer could have purchased a home costing $500,000 because the prevailing mortgage rate was around 5.5%. In other words, the buyer lost an estimated $71,000 in purchasing power because of the higher mortgage rate.
Today’s mortgage rates are the highest in about 20 years, but their impact is much more severe. In 2003, a 7% mortgage rate was not such a heavy burden because homes cost much less than they do today. A decade or more of rock-bottom mortgage rates allowed home prices to surge to record levels – levels some economists say are not sustainable with mortgage rates this high.
“The combination of high monthly mortgage payments and historically low housing inventory has pushed many would-be homebuyers out of the market,” the report’s authors wrote.
“Home-purchase applications dropped to their lowest level in nearly 30 years during the week ending August 18, and Redfin’s Homebuyer Demand Index—a measure of requests for home tours and other buying services from Redfin agents—was down 7% year over year.”