What it takes to buy your first home now

« It was a huge difference, » said Mr Holland, who is 30. « We knew it was going to increase, so we didn’t want to keep looking. We wanted to lock it down.

After a bidding war against 14 other buyers, they paid $395,000 in May for a three-bedroom, two-story home in a leafy, family-friendly neighborhood in Canton, Georgia, about 10% above the asking price of $359,000.

To make up the difference between their budget and the final cost, Mr. Holland and Ms. Cameron received a gift from parents to help with the down payment and spent around $5,000 to buy out their mortgage rate at 5.875%, using in part a withdrawal from Mr. Holland’s retirement account. Mr. Holland works in technology consulting and Ms. Cameron works in a hospital.

« We certainly weren’t happy with our timing, but there was nothing we could have done about it, » Holland said. “In this neighborhood, the houses do not stay on the market. They just left in a week.

First-time buyers face an exceptionally difficult housing market, threatening to exclude young households from home ownership and the wealth it can bring. Even with rising prices, home ownership has become more affordable for many families in late 2020 and early 2021 due to historically low interest rates. But now rates have skyrocketed and prices continue to rise.

With house prices hitting new highs, the median sale price of existing homes in May rose 14.8% to more than $400,000, a record even when adjusting prior prices for inflation. The number of homes for sale remains well below normal levels for this time of year, forcing buyers to engage in bidding wars and give up the usual protections in their offers.

The average rate for a 30-year fixed-rate mortgage jumped to 5.81% this week, from 3.1% at the end of 2021, according to mortgage finance company Freddie Mac.

This has increased the monthly payments expected from buyers by hundreds of dollars per month.

And rental prices are also rising, making it harder for potential buyers to save up for a down payment.

« It’s getting a lot harder to qualify, even for borrowers who are well qualified, » said Eric Bernstein, president of LendFriend Home Loans in Austin, Texas.

After holding steady in 2020 and 2021, thanks to historically low interest rates, the proportion of first-time buyers on the existing property market has fallen this year as rates have risen.

First-time buyers accounted for 27% of existing home purchases in May, up from 31% a year earlier, the National Association of Realtors said.

While first-time buyers are forced to make financial strides to buy homes or delay buying altogether, younger households could see a lag in wealth accumulation and even miss out on decades of capital gains including have benefited older generations of owners.

The higher costs pushed many buyers out of the market. In May, the monthly mortgage payment on the typical home jumped to $2,031, assuming a 30-year fixed-rate mortgage with a 20% down payment, from $1,378 a year earlier, according to Zillow Group Inc.

Rising rates are expected to slow house price growth later this year, but that hasn’t happened yet and demand continues to outstrip supply.

« Instead of having 15 or 20 offers [per home], we see maybe three, four or five offers,” said Abe Lee, a real estate agent in Honolulu. “They say, ‘I don’t want to lose, I need this place.’ So they will raise their bids and pay more.

First-time buyers struggle the most during bidding wars, as they often have limited savings compared to buyers who have benefited from the sale of a previous home or investors who are able to pay cash.

Millennials accounted for 43% of existing home buyers in the year ended June 2021, according to NAR. Young millennial buyers, ages 23 to 31, paid a median purchase price of $250,000; older millennials, ages 32 to 41, paid a median purchase price of $315,000.

Jacquelyn Pica, who works in marketing, and Alex Villavicencio, an auto mechanic, struggled to find starter homes on the market this spring in St. Petersburg, Florida, within their budget of around $300. $000. They went to open houses attended by 30 or 40 other buyers. Interest rates rose about a percentage point in the weeks they spent house hunting, adding to their expected monthly costs.

After losing four bids to higher bidders, the couple decided to sign their lease for another year and continue saving money.

« It really scares me, because it’s not like it’s going to be more affordable a year from now, with interest rates going up, » said Ms Pica, who is 26. « It’s not even my choice, because I can’t force a seller to accept an offer. … It’s so ridiculous and disheartening.

The national inventory of homes for sale was unusually low before the Covid-19 pandemic and has plunged further in the past two years. Potential sellers stay put because they fear they won’t find anything better to buy. Many older Americans choose to age in place. And the construction of new homes since the 2007-2009 recession has lagged behind historical levels.

Homebuilders have ramped up business over the past two years, but construction has been slow due to supply chain issues and labor shortages. Newly built homes, which accounted for about 13% of total home sales in the first quarter, are also often more expensive than existing homes. According to Census Bureau data, only 9% of new homes sold in May were priced below $300,000, compared to 23% of new home sales a year earlier.

DR Horton Inc.,

the largest homebuilder by volume, said in April its second-quarter average selling price was $400,600, up 23% from a year earlier. Bill Wheat, the company’s chief financial officer, told a conference in June that he expects home price growth to slow by the end of the year.

According to the Federal Reserve Bank of Atlanta, a median US household owner needed 41.2% of their income to cover payments for a median-priced home in April. That was up from 32.6% at the end of 2021 and the highest level since 2006.

First-time home buyers who are unable to purchase could face short- or long-term financial ramifications.

Home ownership is a key wealth-creating tool for the American middle class. The median homeowner had $254,900 in wealth in 2019, compared to $6,270 for the median renter, according to the Federal Reserve’s Consumer Finances Survey. And for all but the highest income households, their residential properties accounted for the bulk of their overall wealth, according to First American Financial. Corp.

Between 2010 and 2020, the total value of owner-occupied homes in the United States increased by $8.2 trillion to $24.1 trillion, according to NAR.

Homeowners also get favorable tax treatment because they can generally deduct interest and property taxes paid on a personal mortgage, said Baltimore financial planner Elliot Pepper.

On the other hand, buyers stretching financially to buy a home could quickly find themselves underwater if home prices drop, said Curtis Crossland, a financial planner in Scottsdale, Arizona.

Buyers who walk away from the market may have a harder time saving for a future purchase. US inflation rose 8.6% from a year earlier in May, a four-decade high. The national median rent in May was $1,343, up 15.3% from a year earlier, according to rental website Apartment List.

Savings accounts or other safe investments do not rise at the same rate as house prices. For example, a buyer planning to buy a house for $400,000 could set aside $80,000 in a savings account for a 20% down payment. In 2021, house prices rose 18.8%, while savings accounts returned less than 1%. That $400,000 home in 2021 could now cost $475,200, and a 20% down payment now requires about $95,000, said Bryan Minogue, a financial planner in Madison, Wis.

The average cost of closing a mortgage on the purchase of a single-family home in 2021 rose 13.4% from a year earlier to $6,905 including taxes, according to CoreLogic’s ClosingCorp.

The housing market has started to cool, which could benefit buyers who can afford to wait, although many economists believe prices are unlikely to fall nationwide. In many markets it is starting to become less competitive for buyers, estate agents say. Homes are staying on the market longer and more sellers are cutting prices, although list prices remain above levels of a year ago.

For many households, soaring housing prices have prompted them to move to more affordable markets.

Megan and Brenten Stout hoped to buy a home in 2021 in Michigan’s Grand Traverse County, but delayed their plans due to rising home prices. Their landlord raised their rent from $1,350 to $1,400, so the Stouts moved with their four sons to a smaller place last summer.

They eventually bought a house about two hours away in Saginaw, Michigan, in April for $237,500. Mr. Stout, who worked in a winery, is looking for a job closer to Saginaw.

« I’m super excited, » Ms. Stout said. « I’m 36, but I feel like we’ve made it. »

Write to Nicole Friedman at nicole.friedman@wsj.com and Veronica Dagher at veronica.dagher@wsj.com