Rising Interest Rates, Housing Prices Keep Millennials Renting

Millennials are being shut out of the real estate market as rising home prices and interest rates are pushing homeownership out of the reach of many first-time buyers.

According to a report in Fortune citing Mark Boud, chief economist for Metrostudy, a unit of real estate data and marketing company Hanley Wood, those 35 and under aren’t realizing the American dream of homeownership like previous generations because of affordability woes.

“Prices have risen a lot, and they’re still rising because we’re still way under-building compared to household formation,” Boud said in an interview with Fortune. “At the same time, rates on home loans are rising, making it much harder for millennials to qualify.” According to the report, the problem of affordability will only get worse because of the homes the builders are developing. The average home is now around 3,000 square feet, which is too big for first-time home buyers. Boud noted that a decade ago, a 3,000 square foot home in Las Vegas would go for $225,000 — and now it’s at $350,000, which is too expensive for many young buyers. As a result, the economist predicted that home sales will move back to affluent people who have had high-paying jobs for years and can get approved for the mortgages.

The economist told Fortune the solution to the problem is for builders to lower their costs and make homes that are more affordable for first-time buyers. The homebuilders should also work with lenders so that they can offer interest-only mortgages that would keep the monthly payments down in the early years when the buyers are just starting out. Homeowners associations dues also have to be lowered to enable more first-time buyers to afford new homes, noted Boud. The economist noted that more smaller homes, say in the 2,000 square foot range, would also be welcomed by buyers.