45 million millennials are ready to buy a home, but the timing is terrible

• Mortgage rates reached the highest level since March 2020.
• Inflation will put pressure on mortgage rates even more in 2022.

Mortgage rates are climbing, and it could put a lid on the record-breaking housing demand we've seen in the last few years.

The average U.S. fixed rate for a 30-year mortgage rose to 3.56% this week, reaching the highest level since March 2020, according to Freddie Mac. As inflation puts pressure on the economy, rates are expected to continue rising in 2022.

"Inflation tends to push up mortgage rates, so I anticipate that we'll head into the new year with higher rates than we ended 2021 with," Ralph McLaughlin, chief economist at Haus.com, told Bankrate.

The higher mortgage rates rise, the more pressure it puts on housing affordability. This is because there are not enough homes available to purchase and prices are rising. As a result, buyer competition has increased and it's keeping housing out of reach for many, especially millennial buyers – a large portion of the first time buyer demographic.

"This could be the worst market for a first-time homebuyer that I've ever seen," Sheryl Garrett, certified financial planner, told CNBC.

Millennials and first-time buyers struggle to compete for housing

First time buyers continue to struggle to compete with cash and non-primary residence buyers, a problem that could worsen as mortgage rates rise.

"A gradual uptick in mortgage rates will make affordability a top consideration for home buyers, especially the 45 million millennials aged 26 to 35 who are at prime first-time home buyer age," Danielle Hale, Realtor.com chief economist told Insider.

Although millennials are approaching their peak homebuying years, Zillow claims that young buyers now make up a "smaller share of the market than in previous years." The company's data shows Boomers are eclipsing the generation in sales, suggesting first time home shoppers are "being crowded out by demand from repeat buyers."

In 2020, millennials, many of whom are still paying off student loan debt, accounted for 38% of homebuyers. That number fell to 37% in 2021 as the market saw competition tighten, and the number of available homes for sale decline. The rate could fall even further in 2022 as the demographic competes in a market desperate for supply.

"The combination of higher home prices, rising construction costs and moderately higher interest rates will exacerbate housing affordability conditions and increasingly push prospective buyers out of the market in the coming months," Robert Dietz, National Association of Homebuilders chief economist told Insider.

Building more homes would make housing more affordable

In addition to rising mortgage rates, there are not enough homes available to purchase as supply has fallen to historic lows .

The housing market is 1 million homes short of what is needed to meet the nation's demand, according to the NAHB. As building material costs soar, the organization says, tens of thousands of dollars have been added to the price of a new home, causing housing affordability to plummet to its lowest level in nearly a decade during the second quarter of 2021.

Dietz told CNBC that about 800,000 to 900,000 single-family homes need to be built for household formation growth, adding that another 200,000 to 300,000 are needed per year for the replacement of housing and second homes. With more homes on the market, costs could improve for first-time buyers as competition eases.

"Given that interest rates are expected to increase, housing affordability will be under additional pressure in 2022," Dietz told Insider. "Such challenges are particularly frustrating for prospective first-time and first-generation homebuyers, who do not have access to existing home equity to help finance a home purchase."

If inventory remains stagnant and mortgage rates continue to rise, this could put even more pressure on home prices. In a housing market desperate for inventory and experiencing serious competition, housing affordability may soon be out of reach for the nation's millennials.

Are you a millennial who is having a hard time finding an affordable home? Reach out to this reporter at alloyd@insider.com to share your story.