Real estate has frustrated would-be buyers since it exploded during the pandemic. After years of chasing a red-hot housing market, is there relief on the horizon? The answer is maybe, but only for the fortunate few who can make the numbers work.
High prices continue to be the big hurdle. Five years ago, the median price for an existing home was $266,300 – today, it is $396,900, a 49 percent increase.
As a comparison, over the same five years, inflation has increased by 23%, which means that existing home prices have risen by more than twice the overall pace of inflation.
Additionally, mortgage rates have jumped too. In March 2020, the average 30-year mortgage rate was 3.3% and today it’s 6.8%. Then there’s rising homeowner’s insurance premiums and property taxes, all of which mean that the cost of carrying a house is steep.
Amid this affordability crisis is a glimmer of hope. Just in time for the spring selling season, there is evidence that the rate of home price increases is slowing down, and one reason is there are more homes for sale.
According to real-estate brokerage firm Redfin, new listings are up 4.2% year over year to their highest level for any comparable time period in three years. And unlike the COVID-era bidding wars that wreaked havoc on the market, the average home is now changing hands for 2% LESS than the listing price.
If you are preparing to take the plunge, start by running the numbers. Make sure that you have an adequate down payment — although you may qualify for a down payment of less than 5% for some loans, it is more prudent to have at least 10% and ideally, 20%.
Accumulating the down payment is a major hurdle in the process. According to a new Bankrate survey, 78% of aspiring homeowners earning $100,000 or more annually say the expenses from down payments and closing costs are a significant obstacle to affording a home. (Contrary to articles like this one from New York Magazine, most parents are not able to “gift” their kids big money towards home purchase down payments!)
Next, start figuring out what kind of mortgage could work for you. One sign that you might not be ready to buy, is if the only way you can purchase the house is by keeping your fingers crossed and hoping for a refinance to a lower rate. Run the numbers with a 30-year fixed rate loan – and be realistic about your job security. I have heard from a lot of government employees who have found themselves suddenly out of work but still having to pay the mortgage.
With your basic estimate of the monthly nut for your dream home in hand, you need to see if your cash flow can absorb the purchase. When I became a financial planner in the 1990s, we relied on the “28/36 rule,” which means that consumers should spend no more than 28% of gross monthly income on housing and no more than 36% on all debts.
Given today’s higher prices, those rules might be somewhat limiting. Another way to think about a purchase is to ask yourself, if you were to buy, would you be able to afford your ongoing monthly costs, and could you continue funding long-term goals like retirement and college tuition? If the answer is NO, then you may be overextending.
Finally, owning a home is not the only way to accumulate wealth. Renters should remember that money that they would have spent on a down payment, mortgage, taxes, insurance, and ongoing maintenance is available to save and invest for the future.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com,