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Homebuyers wonder about the amount of money needed to purchase a house, whether they are looking to upgrade their current home or buy their first one. The answer has become more complex due to inflation and high interest rates.
Lawrence Yun is the chief economist of the National Association of Realtors. He says that many first-time homebuyers can still purchase a house with less than five percent down.
He says that first-time homebuyers who want to stick within their budget can pay as little as 3.5 or even zero percent.
This last part is crucial, because banks no longer approve mortgages as readily as they used to. Yun explains that 'people who can afford to buy at 5% cannot get a mortgage at 7 % at their income level any more, which impacts what they can purchase'. According to NAR, the median price of a home is currently around 375,000 dollars, and the median downpayment is 13 percent.
It's no longer as simple to qualify for a home loan as it used to be. "With credit card debt at its highest level ever, we are seeing move-up-buyers who can no longer qualify to purchase a larger house or upgrade to a new neighborhood," says Elena Sordo King, Senior Vice-President of First Bank, an old regional bank that has offices in Missouri and California. TransUnion's latest quarterly report shows that credit card debt will reach a record of $930.6 billion by the end 2022. This is a 19% increase from the previous year.
In some cases, this can disqualify younger first-time home buyers. According to the Federal Reserve, the average federal student debt balance is over $37,000. The pandemic has caused many students to not make payments because they are deferred. However, the amount of debt that they have affects their ability to qualify.
Many homebuyers are delaying their first purchase because the stakes are higher than in recent years. According to the NAR, the average age of first-time buyers is now 36. This is the highest ever recorded. Also, there are fewer first time homebuyers looking for a house. The share of first-time homebuyers is at its lowest level since NAR started tracking data.
Many experts believe that interest rates are at their peak. Yun says that the Federal Reserve has stopped raising interest rates. Consumer price inflation is expected to be lower by the end the year due to the amount of apartment construction.
"People are talking about the price for eggs, but rent, which represents an average of 30% of budgets, is a bigger factor in inflation." Yun, in turn, believes that once the Fed starts to lower interest rates, rents will start to drop.
Even with high interest rates, a home is a good investment.
Both Yun and Sordo King believe that owning a home is one of the best investments.
Yun says that if I asked people who bought homes in the 1980s or 1990s when rates were in double digits if they had made the right choice, the majority would say yes. It's because homeownership leads to a steady accumulation of wealth, and you can refinance at a lower rate.
The psychological impact is what's different now. Yun says that everyone became accustomed with 3 percent rates, and when they see 6 or 7 percent they find it too high. Not only will we become accustomed to the new normal over time, but it could change.
Sordo King says that in two or three years, we will not be in the same situation. 'Interest rate fluctuations will be down but they will fluctuate and flow. The important question is whether you can afford to pay that amount for the next 36-48 months.'
If you are a first time buyer and you can qualify for a mortgage, your monthly payment will be similar to what you would pay in rent. Both experts said it is OK to purchase now, particularly when you think about the possibility of a future lower payment. Sordo King says, 'You date the rate but marry the house'.
A lack of inventory has not changed the fact that there are still multiple offers for homes. Yun says that because there are fewer homebuyers, homes tend to stay on the market a bit longer. "But because inventory is so low, particularly in certain neighborhoods, homes can still draw multiple offers." This is particularly true in areas with lower prices.
Yun, however, believes that the forecast is positive. He says, 'I believe we will have more inventory as there is an incentive to build more houses'. 'Even if the construction costs are up and it's hard to find qualified workers, KB and their competitors still make profits,' he says. Note that KB Home, one of the largest homebuilding companies in the US, is making profits.
Before buying a house, ask yourself these questions
The key question you should ask yourself right now before purchasing a house has more to do your lifestyle than with your bank account.
Yun advises: 'Many people have remote jobs or hybrid careers, so it's worth buying a home in another county if the price is more affordable.' You can protect yourself from market fluctuations. He says, 'Don’t stress the budget.' "That is asking for trouble in the event of an economic downturn."
Sordo King says that if you are a first time buyer, it is almost always best to buy - as long as you meet some criteria. If you are going to pay the same amount of money each month as you do now, but will be able build equity in your home, then jump into it, says Sordo-King.
Only if you're sure that you'll be staying in the same area for a long time, should you consider buying. It's never a good idea to buy at a high point in the market, only to have to sell soon after.
Most home buyers are able to obtain loans that require relatively small down payments if their debts are manageable. You may have to buy a smaller house than you originally planned or in a different area, but you will not be at risk of defaulting. And you can refinance later if you wish. Shop around to find the best interest rates.
While interest rates and inflation have increased, home buyers still have plenty of opportunities to upgrade their homes or get a taste of the real estate market. No matter when you purchase, history shows that real estate is one of the best investments you can make.