Evidence continues to mount that buying a home has become too expensive, leading some to believe that the American dream of home ownership is slipping away.
Exhibit A is a new study by Redfin indicating that US buyers need an income of $107,281 to buy a typical home. The report also noted that the median monthly payment for a new home was $2,682, as of October 2022.
“The income required to buy a home then soared in 2022 as mortgage rates rose at their fastest rate in history, reaching 7% at the end of October (compared to 3% in January),” the study notes. . “House prices have also continued to rise for much of the year, although they have now started to decline from their peak and year-over-year growth has now slowed to about 3%.”
Why are houses so expensive?
Real estate experts say the reason house prices are so high is rising mortgage rates.
“Rising mortgage rates have had an impact on the number of homes buyers can afford,” said Orchard Mortgage chief financial officer Sean Roberts. “Looking at a typical family with a household income of $125,000, in January, a conventional 3.2% fixed rate 30-year mortgage with a monthly payment of $2,400 would have given this client the ability to qualify for a $660,000 mortgage and afford an $825,000 home (with a 20% down payment).
Now, with mortgage rates closer to 7%, the same buyer may only be able to qualify for a $480,000 mortgage and afford a $600,000 home (with a 20% down payment), while maintaining the same monthly mortgage payments, Roberts said.
“It’s effectively a 28% reduction in purchasing power, which is significant for these potential buyers,” he noted.
The issue of home affordability is particularly difficult for new home buyers.
“It’s difficult for buyers today, especially first-time home buyers, to save enough money for a down payment and closing costs,” said Melissa Cohn, regional vice president of William Raveis. Mortgage. “Even with the ability to deposit as little as 3% – and in some cases 0%, it is difficult to have enough money for closing costs and the cash reserves needed to get approval for a mortgage.”
Therefore, it takes longer than ever to save enough money to get a new mortgage.
“We are seeing that the average age of a first-time home buyer has increased accordingly,” Cohn told TheStreet. “Those who are lucky enough to receive money from family or who have built up equity in a current home definitely have an advantage today.”
Home savings tips for tough times
The silver lining of housing affordability is that tough economic times don’t last forever. That’s why it’s always a good idea to save for a down payment and purchase fees.
“One of the best ways to build wealth over time is to buy a home,” Robert said. “That’s been true for decades and it remains true in the future. “
Start the home buying process from the bottom if you must. Even if it’s not your dream home, a first home is a great way to start building the equity you need to move on to a larger property later.
“There’s a saying in real estate that goes, ‘marry your house, date your mortgage,'” Roberts noted. “This means homebuyers need to be prepared for flexible mortgage financing that can allow for low-cost refinancing when and if mortgage rates drop in the future (which is what the market currently expects in the future). end of 2023 and beyond).”
To help homeowners, Orchard Mortgage currently offers a no-cost “lifetime refi” option that allows homeowners to easily refinance their mortgage when interest rates drop again.
Americans saving for a new home also need to start thinking creatively.
“Anyone interested in buying a home and thinking about saving money should review their budget,” said Mihal Gartenberg, Realtor at Coldwell Banker Warburg. “Most of the time, big line items are constant and fixed. Shoppers should start looking at small purchases and treats and reconsider.
To save money that would otherwise be spent on renting, savers might consider moving in with family or short-term friends. “That way you save on rent for a down payment,” Gartenberg said.
The reality is that buyers really aren’t excluded from buying a decent home, but they may need to think about how to compromise when searching.
“Buyers should try not to stretch too far beyond their means, but there is a way for any motivated buyer to find a decent home and close it before the end of the year,” Gartenberg said. .
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