The housing market is on ice. Buyers can’t afford to purchase new homes. Sellers can’t afford to trade up or downgrade from their current homes which would expand the inventory of available homes for purchase. First-time homebuyers are forced to remain renters. This is the outcome of the vexing battle to fight inflation in the short run. 

In the long run, the delay of Millennials and Gen Z achieving the generational milestone of homeownership will lead to fewer people believing in and achieving the American Dream.

What’s happening

Disturbing new numbers and trends have emerged about the long-term impact of the fight against inflation. Buying a home today is less affordable than at any time in recent history:

  • The average monthly new mortgage payment is 52% higher in the U.S. than the average apartment rent
  • Mortgage rates at about 7% are more than double what they were two years ago. An increase of just a few percentage points can mean hundreds of thousands of dollars more in interest over the life of a standard 30-year loan.
  • A third of homebuyers are first-timers which is below the historical average of 38%
  • At 35 years old, the median first-time buyer age is the second-highest age on record—behind 2022’s peak age of 36. 

We are fast becoming a nation of renters. Until interest rates fall, these trends are unlikely to reverse and that could lead to long-term impacts for younger Americans.

For Millennials and Generation Z the American Dream appears to be financially more unaffordable: 

  • The American Dream now costs $3,455,305. That includes the milestones of marriage, two children, homes, healthcare, cars, and education.
  • It costs over half a million to raise two children to the age of 18 ($576,896).
  • The average lifetime cost of a home is now about $796,998. This includes a mortgage with a 10% down payment and a 30-year fixed rate of 7.2%.

No wonder younger generations are so pessimistic about the future.

How we got here

By raising interest rates to cool down spending in the economy, the Federal Reserve Bank has been on a mission to drag inflation back down to its 2% target rate from a 40-year-high of 9.1% in 2022.

While inflation has slowly moderated, rising by 3.1% for the 12 months ending in November according to new data, there are still sticky spots of categories not experiencing deceleration of prices. Shelter or housing is the biggest one. As the biggest driver of inflation today and the largest contributor to the consumer price index (inflation rate), shelter costs are fueling inflation–even offsetting falling energy prices.

Let’s not forget though that prices are still markedly higher today than they were two years ago or at the start of 2021. 

Trillions of dollars in federal spending injected into the economy at a time when it was recovering from the pandemic, touched off inflation not seen for four decades.

Bottom line

Massive reckless spending triggered the high inflation eating away at household incomes and quality of life. Everyday items are unaffordable. Housing costs are accelerating. Households are under financial stress. However, fighting inflation by raising interest rates both raises costs for households and discourages home ownership. Understandbly, young people feel that the American Dream is slipping away.