Buying a first home is 'prohibitively expensive' and 'almost impossible' for many, says Janet Yellen

Soaring home prices and surging mortgage rates have ruled out home ownership for many people, said Treasury Secretary Janet Yellen.

• Janet Yellen told Congress that buying a starter home has become "prohibitively expensive."
• Soaring prices and mortgage rates have made it "almost impossible" for first-time buyers, she said.
• The Treasury chief flagged two proposed tax credits that could boost buying power and raise supply.

Owning a home is a key element of the American dream, yet it's become an unattainable fantasy for many people, Janet Yellen said.

"With house prices having gone up, and now with much higher interest and mortgage rates, it's almost impossible for first-time buyers," the Treasury boss said during testimony before the House Ways and Means Committee on Tuesday.

Yellen was nodding to the fact that the median house price has jumped 40% in the past four years to a near-record high of over $420,000, per Redfin data.

At the same time, the 30-year fixed mortgage rate has surged from around 3% at the end of 2021 to around 7%.

Put differently, homes are pricier than ever, and borrowing the money required to purchase them has become far more costly. As a result, Yellen said that buying a first home is "almost prohibitively expensive."

Mortgage rates have soared since early 2022 because the Federal Reserve has hiked its benchmark interest rate from nearly zero to north of 5% in an effort to curb historic inflation.

That has created a "lock-in effect," Yellen said. Prospective sellers are holding off on listing their properties because they're unwilling to give up the dirt-cheap mortgage rate they secured years ago.

The resulting inventory shortage has pushed up home values and fueled an affordability crisis. Potential buyers are balking at paying much higher prices and taking on far larger monthly mortgage payments than they expected, meaning the housing market is essentially frozen.

"We know that affordable housing, and especially starter homes, is an area where we really need to do a lot to increase availability," Yellen said.

The veteran economist and former Fed chair highlighted two proposals from the Biden administration that might alleviate the problem.

The first is the mortgage relief credit, which would give first-time buyers a $10,000 tax credit spread over two years to help them purchase their first property.

That would reduce the effective mortgage rate on the median home by over 1.5 percentage points for two years, potentially helping more than 3.5 million middle-class families, the White House said.

Biden has also proposed a one-year tax credit of up to $10,000 for middle-class families that sell their starter home to someone who'll live in it. The White House estimated the credit would help nearly 3 million families.

Moreover, the president has called on Congress to expand the Low-Income Housing Tax Credit and other legislation with the goal of building and renovating more than two million homes to help address the wider housing shortage.

However, real estate experts have previously told Business Insider that Biden's measures could stoke more demand and push up home prices, and warned it would take years to close the supply gap.