With record high home prices in the US, it’s easy to get discouraged. With rising rates and low inventory, buying a house right now might even seem impossible. As of the third quarter of 2023 the median home sales price in the United States is over $430,000. That’s actually up 3% from the last quarter of 2023. Ironically enough, it probably won’t get better anytime soon either. If you haven’t bought your home by now you may be thinking it’s a lost dream. The good news is, that’s not necessarily true. However, the playing field has changed a little bit.
The market remains tight and inventory low due to the fact that 90% of current homeowners are locked into lower mortgage rates. 14 million mortgages were refinanced during the record low mortgage rates of the pandemic. According to Yahoo Finance, 82.4% of homeowners have a mortgage rate below 5%, 62% have a mortgage rate below 4%, and a whole 23.5% of homeowners have a mortgage rate below 3%. (At the time of writing this), today’s interest rate has topped over 8%. That is a far cry from the 3% that we seen just two short years ago.
To give you a perspective, let’s just say you found a house for $250,000. With a $50,000 down payment (20%), for a 30 year mortgage with today’s 8% interest rate, without taxes, PMI, or homeowners insurance, your monthly payment would be about $1467.
Now let’s take that same house price of $250,000 with the same down payment loan terms but with a 3% interest rate, your monthly payment drops down to $843. That’s a difference of $624 per month! Not to mention, this is a lowball house price and if you live near a major city you probably are going to have a hard time finding anything close to that anymore.
The truth is, this factor is keeping a lot of households from relocating. It doesn’t make sense financially for someone who has locked in to a record low interest rate to jump all the way up to an 8% interest rate. I myself am who has fallen victim to not being able to relocate due to higher rates.
Despite record high interest rates, combined with record low inventory, the housing market still remains active. This is indication that although changing, the American Dream of home ownership is not necessarily dead.
The good news is, owning a home has actually never been easy. Talking to older adults from earlier generations, it’s pretty much always been the same story. In 1950 minimum wage was less than a dollar an hour. While the average home price was only $12,000, – at a dollar an hour with a 40 hour work week it would take you six years of saving every penny to come up with that $12,000. We’re actually not too far off from that today. If the average American makes about 60,000, times the six years that comes out to $360,000. Not that far off from the median house price of 430,000, not to mention you’re getting a lot more for your money. That $12,000 house was probably the size of a master bedroom nowadays.
And truth is, the markets and values do go up and down. You might buy at a good time, you might buy at a bad time. But the dream remains the same. Anyone who really wants to buy a house of their own can make it happen. It’s showing now by the continuing amount of home sales that are still happening across the US.
All this said, there are still things you can do to help you get in a home. I put together a list —-
- Improve your credit score. Although a higher score is it necessarily going to save you a ton of money, generally speaking you will get a slightly lower interest rate which does help. Not to mention by improving your credit score you will be paying off debt, which will free up available income you could save for a down payment and even pay off other things sooner which will keep your debt to income ratio low.
- Cut your spending. Saving for your first house generally means working hard, hitting the grind and saving money. The best way to do that – to illuminate every unnecessary expense. You hear countless stories of young adults eating Ramen noodles every night instead of going out while putting every available penny away towards that down payment. And it’s true. Every dollar adds up, and when you have the mindset of oh it’s just a dollar, you would be surprised how fast those dollars add up. Ask yourself, do I really need this? before you buy it. Although it is true things are much more expensive today than they were yesterday, a lot of the things we have are things we don’t even need. Do you really need a brand new car or the latest iPhone? These are all expenses that add up – they didn’t have back then.
- Try for a 15 year mortgage if you can afford to do so. 15 year mortgage rates are a little lower than 30 year mortgage rates because lenders see them less likely of a risk. It might cost you more money monthly, and so you might have to save up a little more of a down payment, but if you can a 15 year mortgage would definitely be the way to go to save you money in the long run – and get a lower interest rate.
- Keep your monthly mortgage below 28% of your monthly income. Owning a home is a big financial responsibility, and often times unforeseen events come up. Home ownership can be expensive to maintain. You don’t want to max out your monthly budget on your home just because it’s your ‘dream home’.
- The more money you can put down the better. Although a down payment of at least 20% would be ideal, anything you can put down to drop the amount finance to some thing you can afford will do. Many places only require 5%-10% down, but just remember the more money you can put down the less the mortgage will cost you and the less your payments will be. Also keep in mind with a down payment of at least 20% you will eliminate the need for PMI (property mortgage insurance) which can save you a couple hundred dollars per month. You can also estimate your PMI by multiplying the loan amount by the PMI rate which is typically anywhere from .2% – 5%.
- Pay closing costs, realtor fees, moving expenses, any extras or add-ons to the house, or anything else you can with cash. Although this is not necessary, especially if you are already hard-pressed for cash, it will keep the financed amount lower than having these costs added to a credit card or bundled up in your mortgage. Keep in mind, if you are buying a pre-existing home you may have to paint or improve some features that could be negotiated through closing. You can always ask or negotiate with the seller to try to cut some of these expenses from having to do them or fork out money later. On a sidenote, it also might be a smart idea to take out a home warranty. I have used them in the past and personally would recommend it for older homes.
- Save longer. It might be tempting to rush through or buy now just because you’re unsure of the market, or are you found a home you’re really in love with or you’re just plain tired of renting. But your home is your greatest asset and probably your largest purchase you will ever make. Like I’ve already stated the more money you can put down the better, so if you have to save a little longer to come up with that down payment, then do it. You’ll be glad you took those steps now so you could have it tomorrow and afford it.
- Set realistic expectations. Decipher between what you want and what you need. Do you really need a six bedroom, five bathroom house? Or would a 1200 square-foot three bedroom two bathroom house do just fine? Do you need a big yard? Do you need to live that close to the city? All those marble countertops and walk-in showers look and sound nice, but they all add significant costs to the home price. HDTV has set unrealistic expectations of what homebuying – let alone buying your first home is. If you want to live in luxury and live that close to the city or action, reevaluate your wants. Would you be just as content with a luxury apartment? Or do you want a place to call your own? You can always fix it up and make it yours over time or at a later time when money becomes available, but if wanting to have a place you could call your own is your main priority, you might have to sacrifice some things on your wish list to get you where you want to be.
- Extend your search area. Relocate if you have to. Most often than not, your highest priced homes will be placed in highly desired areas. This can be close to downtown, close to businesses or stores, or just neighborhoods everyone wants to live. Although I highly do not recommend buying a house in a bad part of town just because of the price, there are usually other options. Move out to the suburbs or even beyond. Depending on your job or how far you commute, you might be able to save a lot of money by living away from the area you might be currently looking (keep in mind rural areas are no longer as cheap as they used to be either, due to many people now being able to work remote, although they usually are still a bit more affordable).
- Increase your income. Of course this step is easier said than done, but if you are able to work more hours, ask for a raise, or even start a side hustle, you might find that extra income useful in saving for a down payment or even allowing you to afford more home. If you still find yourself completely unable to afford a home, maybe you need to reevaluate your income. Perhaps in another state or area you could make more doing the same thing you’re doing now? Or even working for another company? Or maybe it’s time for a career change altogether. Nevertheless, the more you make the more you can afford.
- Don’t get discouraged. Although it may not seem like buying a home it is what it used to be, home ownership is still obtainable. Countless young adults are still managing to find ways to purchase their first home even in today’s market. They’ve put in the time, work and due diligence and they’ve made their dream a reality. You can do it too, just know what you want, prioritize it, and go for it!
Just remember, live within your means and don’t let your emotion make your decisions for you. Your house will most likely be your greatest financial purchase, so don’t let your emotions turn it into your biggest financial mistake. Do the math, and make sure you can actually afford the home you’re buying. Don’t rush into anything just because everyone else’s or your realtor or someone else is telling you you have to. Make sure you are ready for that commitment. I’ve heard realtors and lenders use the term ‘marry the house not the rate’. The thing is, you don’t know how long the rates will remain high. Although typically speaking, anything below 6% is a decent interest rate, the house prices are still a lot more today than they were when our parents bought their first house at a 10% interest rate. You should also stay away from adjustable mortgage rates and remember to stick to your budget. Do you really need that new car, or would you rather have a home to call your own? The American dream might seem like it’s fading, but it is still every bit attainable today as when our parents bought their first home. Best of luck to you, and remember – don’t give up!