Christine Rodriguez decided to extend the lease on her rental trailer home in Des Moines, Iowa, last month, after spending more than a year trying to buy a starter home.

Under the renewed lease, however, she’ll pay 13% more in rent over the next year, with her payment going from $1,200 to $1,350. And with prices also rising for essentials like food, electricity and gas, her monthly expenses will go up from $1,600 to $2,000.

Rodriguez, a waitress in a sports bar, and her husband, Oscar, a construction worker, had been meticulously saving for five years to afford a down payment on a home in the $150,000-$220,000 range. But when they started looking early last year, they found the pandemic had upended the housing market, shrinking the pool of available homes and sending prices to historic highs. Intense competition and multiple bids have forced her to increase her budget for a new home. After starting in the $180,000-$215,000 range, she is now considering prices of between $210,000 and $230,000.

“We have no choice,” says the 36-year-old mother of six. “There are no homes out there. And our expenses are through the roof.”

Rodriguez is not the only one in this predicament. Many Americans are looking for houses but those shopping for entry-level or starter homes – those smaller than 1,400 square feet – are especially challenged.

Over the past 12 months, rents spiked by an unprecedented 18% nationally, according to Apartment List’s National Rent Report released in January. And housing costs saw a similar surge, with the median sales price of an existing single-family home rising to $364,300 in December 2021, up 16% from the same month a year earlier, according to the National Association of Realtors.

Why is the housing market so high right now?

For potential buyers of starter homes, the situation has gotten worse in the past year. Apart from contending with fewer and more expensive homes on the market, rampant inflation and rising mortgage rates further threaten to diminish their purchasing power.

Inflation rose by 7% over the past year, its fastest pace in nearly 40 years, and mortgage rates continued to tick up, putting affordability further out of reach for many.

Indeed, homes priced between $100,000 to $250,000 saw the volume of sales decrease by 23% in December 2021 compared with December of 2020, whereas homes sold in the over $1 million bracket went up by 38% in the same time period, according to data obtained from the National Association of Realtors by USA TODAY.

The data once again throws into sharp relief the divergent experiences of the haves and the have-nots that have defined much of the pandemic housing market.

“There’s plenty of buyer interest but no supply,” says Lawrence Yun, the chief economist for NAR. “The wealthy have enjoyed record highs in the stock market and accumulated housing wealth and can afford high-priced homes.”

One of the main drivers of the housing shortage is the decline in entry-level home construction, according to Sam Khater, chief economist for Freddie Mac. The number of starter homes under construction has declined significantly, from 40% of homes built in 1980 to 7% in 2019.

Tiffany Ehler, a real estate agent who has been working with Rodriguez, says in 2021, the Des Moines housing market saw its lowest inventory of houses for sale in 20 years.

“Since June of 2020, we have been in an inverted market where we have more houses pending than for sale,” she says. “And in 2021, home values increased by close to 20% instead of our usual 4 to 6%.”

Ehler says that either homes have been too expensive for Rodriguez or the house sells too fast.

“It was gone before we could schedule a showing, like, sometimes just later that day,” she says. “And if we went to see one … that she liked, it was gone by the time her husband could see it.”

The missed opportunity to buy a home can have long-term financial consequences and contribute to major disparities in wealth, according to an analysis by the Urban Institute.

For instance, those who bought their first home between the ages of 25 and 34 have the greatest housing wealth, accumulating close to $150,000 in median home equity by age 60, according to the report. People who bought between the ages of 35 and 44 had $72,000 less in home equity by 60, and those who wait until they were 45 or older lost more than $100,000 in median wealth.

“Homeownership has always been the best way to build wealth, and if you can’t grab onto that ladder, you don’t have that opportunity,” says Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute. “My advice would be to, if you can stretch to buy a home now, you should do so because of the long-term opportunities to build wealth.”

Because of the supply and demand imbalance, the likelihood that home prices go down is low, Goodman says.

And that makes trying to buy something crucial, especially with the rental market rising.

“When you enter the housing market, you lock the bulk of your housing expenses with a mortgage,” Goodman says. “In a world with rising inflation, that’s very, very valuable. You are also looking at a couple of years of hefty rent increases, which is only going to make it harder to save for that home.”

Jonathan Weldon is living that reality. Last July, Weldon, a youth pastor, moved with his family from Shreveport, Louisiana, to Georgetown, Texas, some 25 miles north of Austin when he started a new job at a church there.

In Shreveport, he had been able to sell his 2,300-square-foot house in less than a week for $2,000 more than asking. Over the past six months in Austin, where home prices have gone up by 30% in 2021, he’s lost several bids to people offering more than $30,000 above asking on homes priced around $250,000.

Meanwhile, rents are up by 40% in Austin, according to Redfin.

After staying at a church friend’s home for a few months, Weldon is now paying $1,475 to rent a duplex townhouse, more than what he was paying in mortgage on a larger house in Shreveport. A year ago, the rents in Austin for a similar place would have been closer to $1,000-$1,100.

“It’s tough because the last thing I want to do is pour money into something that I’m not getting any return on. I really did not want to rent at all,” he says. “If you’re going to stay somewhere longer than two or three years, you need to be building equity, and we’re not doing that right now.”

Chris Lefforge, a Redfin agent who has been working with Weldon, calls it “a perfect storm.”

“We have a whole bunch of new people moving here from all around the country, and we’ve got about 29 days of inventory. A balanced market would be about six months of inventory,” he says. “In addition, we’re also having competition, not just from other first-time buyers, but also investors trying to buy up all the properties that they can, especially in the lower price range.”

While starter homes tend to be in the $250,000 range and remain the most competitive, the sales of the most affordable homes (median sale price of $127,500) rose 11% year over year in the fourth quarter of 2021, according to Redfin. This is likely due to a few trends, including investors buying up properties that are fixer-uppers, workers earning more as the economy strengthens and the end of mortgage forbearance causing some homeowners to list their homes, says Daryl Fairweather, the chief economist for Redfin.

“We’re seeing an increase in listings of the most affordable homes now because those are owned by people who are likely lower income, more likely to have been laid off during the pandemic and more likely to have missed payments,” she says. “Since the market is so strong, people who are behind on their mortgages might think it’s a good time to cash in and list their homes.”

Home prices rise out of her range

When Alexa Erb, 27, found a new job at Boston University last month working on diversity and inclusion initiatives, she enrolled in a course for first-time homebuyers. Her current role at Bentley University in Waltham, Massachusetts, comes with free on-campus housing, and Erb says she’s hoping to buy a condominium when she takes up her new job next month rather than pay rent.

“I have had the privilege of free on-campus housing for the past couple of years and saved up for a down payment. I want to build some of that social and cultural capital that comes with purchasing a home,” adds Erb, who is looking for something in the $300,000 range but acknowledges, “There’s very little in my price range.”

That hasn’t stopped Erb from putting in three offers in the past three weeks.

“The first one, I put in an offer a couple of thousand dollars over asking,” she says. “And was very clearly beat out by one of the other 30 people who were at the open house and had the means to offer something even higher than I could.”

But Erb says she’s determined and plans to sign a short-term rental lease, perhaps an Airbnb, until she finds a place of her own.

“I think that it is a really important way to set myself up,” she says. “Buying my first home feels appealing knowing that my money is going towards something.”

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