The Elusive American Dream

Traditional milestones of the American Dream such as raising children and purchasing a home now require a financial commitment that far surpasses the average earnings of a typical worker.

A recent study by Investopedia revealed that realizing the "American Dream" entails an estimated cost of about $3.4 million throughout a lifetime, encompassing events like marriage and retirement savings.

Earlier research by Georgetown University indicates that the median lifetime earnings for the typical U.S. worker amount to $1.7 million.

Yet another study by USA Today calculates that supporting the American Dream costs about $130,000 annually for a family of four, while the median household income, according to the Census Bureau, stands at around $74,450.

Taken together, these reports, even if moderately accurate, underscore the economic challenges faced by many families striving for a middle-class life, given the rising expenses associated with childcare, college tuition, and home ownership.

A Bridge Too Far

Owning a home, once within reach for many Americans, has evolved into an elusive aspiration, even for those who had the means to purchase just a few years ago.

The surge in home prices during the pandemic left aspiring buyers feeling financially stretched, despite the comfort of low mortgage rates at the time. Now, as mortgage rates have climbed, a growing number of people are simply giving up on the dream of owning a home.

The affordability of homes has reached unprecedented lows, and there seems to be no imminent change in the economic equation. Forecasts indicate that home prices are unlikely to revert to pre-pandemic levels.

The Federal Reserve, which initiated aggressive rate hikes early last year to combat inflation, has shown little inclination to reverse course. Although mortgage rates recently dipped to just below 7 percent, the lowest in several months, they still stand at more than double their levels from two years ago.

Typically, elevated mortgage rates would result in a slowdown of home sales and a subsequent softening of prices. But not this time. While home sales are indeed declining, prices continue to rise, a phenomenon attributed to a scarcity of available homes. In October, the national median existing-home price was about $392,000.

Higher mortgage rates translate into rapidly accumulating costs. A mere uptick of a few percentage points can result in hundreds of thousands of additional dollars in interest over the life of a standard 30-year loan.

It means buyers receive considerably less value for their dollar.

Before the Fed's rate hikes, a person with a monthly housing budget of $2,000 could have conceivably bought a home valued at $400,000. Today, that same budget would only afford a home valued at less than $300,000.

First-time and younger buyers find themselves sidelined in this challenging market. Only about one-third of buyers this year were first-time homebuyers, falling below the historical average of 38 percent, as reported by the National Association of Realtors.

The median age of first-time buyers, at 35 years old, reached the second-highest level on record, surpassed only by the peak of 36 years old in 2022.

Although rents are on the rise, the surge in the cost of buying a home far exceeds this increase. According to CBRE's analysis, the average monthly new mortgage payment in the U.S. is 52 percent higher than the average apartment rent.

This premium is even more pronounced in major metropolitan areas, reaching 175 percent or more in cities like Seattle, Austin, Texas, and various locations in California. Consequently, some folks are abandoning the pursuit of saving for a down payment altogether.

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This story is from our latest edition of The Rising Tide, our weekly newsletter to keep you informed of business trends that touch all of our lives. Subscribe at https://barberd.substack.com/