Every year, without fail, the holidays seem to find a way of sneaking up us. It’s not that we’re unaware of the passage of time, it just seems to fly by faster than any of us would like. The only thing faster (and scarier) than the spinning holiday clock is the amount of cash flying […]
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First-time homebuyers who found it difficult to enter the housing market a year ago due to fast-rising prices are now getting squeezed from a second direction, as rising interest rates erode their purchasing power.
An analysis by national brokerage Redfin found that a homebuyer with a budget of $2,500 a month and a 20% down payment saved up could afford to spend as much as $473,750 on a home at the beginning of 2018, when 30-year mortgage rates were averaging around 4%. With mortgage rates now closer to 5%, that same buyer can only pay up to $444,000 at the most—a loss of almost $30,000 in purchasing power.
The majority of home buyers need a mortgage, so that drop in their financial firepower has led to a market-wide weakening in home prices this season, a morsel of good news for buyers.
“Every fall and winter we see prices decline relative to spring and summer, but this year’s seasonal declines have been more extreme as buyers, especially in coastal markets, are finally reaching a limit in terms of how much they are willing to pay,” said Redfin chief economist Daryl Fairweather. “Sellers haven’t quite come to terms with the fact that they no longer have buyers wrapped around their finger.”
But here’s the rub: While the hot housing market has shown signs of slowing down, it’s hardly stopping or going in reverse. Prices are still rising — just not as quickly. The median price of an existing home still rose 4.2% year-over-year through September, according to the latest data from the National Association of Realtors.
So while that buyer’s household income and other finances may not have changed one bit since this time last year, the $473,750 home they once could afford will now cost $20,000 more — about $493,650.
Combined with the effect of higher mortgage rates, they now need to be looking at homes priced $50,000 less than the ones they were considering just a year ago, even though their monthly budget hasn’t budged. That’s disheartening, to say the least.
However, there are a few ways homebuyers can claw back some of that lost ground (in addition to taking advantage of any first-time homebuyer programs you may qualify for).
The average interest rate on a 30-year mortgage rose to 5.06% on Nov. 1 — that’s up an entire percentage point from earlier in the year. But you don’t have to settle for the average rate if you’re willing to do some research and legwork.
“No matter what the national average might be at any given time, you’re always going to be able to find lower rates,” Bankrate chief financial analyst Greg McBride told Consumer Reports.
“Many homebuyers tend to get intimidated by this process and just go with whatever is easiest—usually what their local bank is offering,” he added. “Smart buyers shop around to uncover the lowest offers.”
Other ways to shave down your interest rate include paying points or opting for an adjustable rate mortgage. Points are paid upfront to lower the long-term interest rate of the loan: One point usually equals 1% of the loan and can lower your rate by about a quarter of a percentage point.
An adjustable-rate mortgage (ARM), meanwhile, starts out with a fixed rate for an introductory period (usually five or seven years), and then adjusts yearly according to market conditions. An ARM can be a smart move if you know for certain that you won’t be staying in the home longer than the introductory rate term, but it can really come back to bite you if you stay put — and Newton’s law of inertia suggests that an object at rest tends to stay there.
Another option is using a mortgage broker, who will basically shop around on your behalf and may find even better rates. Mortgage brokers usually get paid by the lender, not you, so make sure to use someone you trust and that you double-check and compare loan estimates yourself.
Buying less home than you can afford is a smart move in any market, but now it might be your only choice. That’s not necessarily a bad thing: Buying a tired-but-livable home you can slowly make improvements to will allow you to build more equity– which is harder to come by when you’re wading into an already high-priced market.
An increasing number of homebuyers are leaving their hearts in San Francisco to hang their hats somewhere cheaper — like Sacramento — according to Redfin’s latest migration report. Likewise, people priced out of Denver are looking at lower cost nearby metros like Colorado Springs or Fort Collins.
It’s something of a drastic step, but expanding your search radius or moving it altogether can open up possibilities that wouldn’t otherwise exist — including home ownership.
This is easier said than done, of course, but putting more money down will reduce the amount you have to borrow, and therefore lower your monthly mortgage and interest expenses.
We don’t recommend raiding your retirement savings or draining your emergency fund for this purpose, but if you were planning to hold onto a big chunk of savings to invest in a renovation upon moving in, you might consider putting that money down instead and delaying the remodel for a few years. Or if you’re a couple moving someplace closer to work or public transit, consider whether you could sell one of your cars and put that money toward a down payment.
It’s also possible to take out a loan against your 401(k), which isn’t as bad as simply pulling money out of the account; you’ll pay yourself back over time at a guaranteed rate of return. However, your retirement account could end up missing out on bigger stock market returns, so it’s not an ideal solution.
You’ve been saving up for a down payment, and this was the year you were going to buy your first home. It was all in the plan! Unfortunately, economic conditions don’t always cooperate with our life goals. If you can’t afford to buy a home you love, and you’re understandably uncomfortable overpaying for one you don’t, you can always just wait things out and keep renting.
Rents have climbed even faster than home prices in the past year, it’s true. But the big benefit of renting is the flexibility it offers. You might be earning more money a year from now, or more open to moving to a lower-priced area. You could even temporarily downsize for a year or two and use that time to turbocharge your savings, so you can eventually make a bigger down payment and buy a nicer house than you could dream of right now — for the same monthly mortgage payment.
The only drawback is the very real chance that mortgage rates and housing prices continue to nudge higher and higher — while you’re forced to keep watching from the sidelines.
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