Hey Reader,

Homeownership has long been one of the main tentpoles of the American Dream. However, thanks to rapidly rising home prices and mortgage rates, the dream feels increasingly out of reach for millions of Americans.

It might be, especially at the moment, and especially for many of our younger readers—but it doesn't have to be.

Today, we're going to look at a growing trend of Americans pulling the handbrake on their homebuying plans … and why this moment should be looked at not as a time to throw in the towel, but as an opportunity to regroup and prepare.

The Tea: This week, we talked to Tom Parrish, Head of U.S. Retail Lending Product Management at Bank of Montreal (BMO) Financial Group, about the Canadian mega-bank's recent Real Financial Progress Index (RFPI). The survey's results showed that, by and large, the U.S. is mashing the "pause" button on homebuying and home refinancing.

Among the biggest takeaways from BMO Financial Group's survey:

• 65% of people who don't own property are holding off buying a home because of the state of the economy.
• 43% are no longer sure if or when they will buy.
• Just 6% of Americans who say they plan to buy a home soon will do so this summer ("on the lower side, historically," Parrish says), and just 4% say that will happen in the fall.
• 81% of Americans planning to refinance their home say they're waiting for rates to drop.
• 68% of Americans say housing costs are their biggest source of financial anxiety.
• 56% of Millennial and Gen Z respondents say they believe homebuying is more out of reach for them compared to when their parents were the same age.

This mass balking at the housing market comes amid astronomical home prices and roaring financing costs.

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A rising cost of homeownership is hardly a new phenomenon. With the exception of a couple years here and there (like the Great Recession), home prices have been on a nearly uninterrupted climb for decades—basically, ever since the data was there to track.

But there's growth in home prices, and then there's growth in home prices. What we've seen the past couple of years is solidly in the latter camp, climbing at a rate, as Doctor Strange might say, hitherto undreamt of.

Two well-known causes for this were pent-up homebuying demand getting unleashed after the earliest innings of COVID and, for a time, the cheapest mortgage rates Americans had ever seen.

I say "for a time" because, in response to a rip-roaring economic rebound and sky-high inflation, the Federal Reserve has quickly throttled rates higher—in turn, sending mortgage rates to levels last seen more than two decades ago.

Let's put this into perspective.

At the start of 2020, if you bought a home at the median price, and financed it at the average 30-year fixed mortgage rate, you'd have bought a $329,000 home at 3.7% (not the lowest interest rates we'd see, but far lower than they are now). To keep it simple, we'll exclude taxes and fees, but you're looking at …

• Monthly payment: $1,514
• Total cost over the life of the mortgage: $545,040

If you wanted to buy that same home, priced at the current median, and financed at the average 30-year fixed mortgage rate, at the end of last year, you'd have been buying a $479,500 house for a rate as high as 7.1%. That comes out to …

• Monthly payment: $3,222 (+$1,708 over 2020)
• Total cost over the life of the mortgage: $1,159,920 (+$614,880 over 2020)

In short: The cost of owning a home more than doubled in just a couple of years.

While the jump in mortgage rates has finally helped cool off demand (and home prices) to some extent in 2023, it's hardly a perfect cure. That's because, at the same time, those high mortgage rates are keeping a lot of supply off the market—and thus keeping a floor under prices.

"Housing inventories are very, very low, as a lot of existing homebuyers are not putting their house on the market, given where rates are," Parrish says. "As you think about upgrading: I know I'm at a very low interest rate on my current house, and even if I wanted to upgrade to something nicer or different, interest rates are significantly higher. That's putting pressure on the supply side of things."

As BMO's survey shows, that has significantly dampened enthusiasm over hunting for a new home, and Millennials and Gen Z especially appear to be discouraged.

But while owning a home is certainly more difficult than it once was, you don't necessarily have to give up hope.

The Take: If you're among the people whose homebuying aspirations have cooled this year, now might not be the right time to buy—but it's also not the time to give up. BMO and Parrish have provided some helpful perspective for prospective homebuyers, as well as tips on where to go from here.

Interest Rates

First, a little context about where rates were, and where they are.

"Rates aren't anywhere near the historic lows we saw for many years, and I don't know if we'll be going back there anytime soon," Parrish says. "But if you think about the long history of where interest rates have been, 6%-7% rates are historically still phenomenal."

Parrish still says people will have to become more accustomed to higher rates than what we saw during COVID. However, moderation and even a reduction in rates isn't out of the question in the future. "And if rates do come back down by a percent or two, some audiences will consider refinancing and/or moving," the latter of which will help bring some inventory on the market.

But Parrish notes that what people are overlooking is their enhanced ability to save compared to before COVID:

"If you're saving for that down payment, think about where savings rates are compared to two to three years ago," he says. "You're making some money at 4% or 5%, where you can make some real progress on your savings."

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Practical Tips to Make Progress

If homebuying isn't in the cards right now, the best thing you can do is take concrete steps to make sure you're financially better prepared to do so in the future. Among BMO's tips:

• Use a digital banking app or net-worth tracker to get a singular view of your finances: What's coming in, what you owe each month, how much you have saved up, and what you would still have in savings after making a down payment.
• Speak with an expert to make a financial plan to reach important milestones (such as saving up for a down payment), and to make sure your savings and payment patterns are on track to reach near- and long-term goals.
• Pay down as much debt as possible and explore ways to increase your credit score. This will have an impact on pre-approval, your mortgage rate, and how much house you can ultimately afford.

The Cure for Anxiety: Education

Young and the Invested Editor-in-Chief Kyle Woodley recently spoke on VantageScore's THE SCORE podcast. As part of that conversation, he said a perceived lack of interest in homebuying by younger generations has little to do with desire, and much more to do with the growing financial difficulty of homeownership.

BMO's survey seems to confirm that those affordability worries are particularly acute among Millennials right now.

"68% of those between 25 and 34 say the perception of the economy is causing them to delay, compared to 34% of those over 65," Parrish says. "There's definitely a dynamic there in the younger demographics that is a little more challenging.

"And if you think about a first-time homebuyer and what's needed to get into a house, it's definitely more challenging and very competitive."

The best thing you can do? Educate yourself.

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For instance, first-time homebuyers need to understand that there's so much more that goes into the cost of homeownership than the house's price and your mortgage rate. There's also taxes, insurance, maintenance … even moving and furnishing costs.

While you can find much of that information across the internet, Parrish also strongly suggests talking to a mortgage expert, who will be in tune with both homebuyers' needs and the current state of the housing market.

"It's crucial, especially in higher-rate environments, for Americans to talk to a mortgage advisor who can help prepare buyers for the homebuying process, work to determine how much a person can afford, and clear up the misconceptions about the many paths to homeownership that exist."

Riley & Kyle

Young & The Invested (Soon to be WealthUp)