According to CNN, mortgage rates have climbed to the highest level in 9 months. But how did this get so out of reach? Historically, buying power balanced out the cost of houses. During the pandemic, interest rates were so low that they triggered a historic surge in home prices. Because of that, property values skyrocketed like never before. When those borrowing costs came back to normal levels, the prices did not drop. The old rule of spending 3x your annual income on a home is now kind of unthinkable. The median property is now going at about 5 to 6 times the average salary. Consequently, the age at which the average person purchases their first home has reached a historic high. Back in the 1960s, it was the early 20s, from 1980-90, it was the late 20s, and now, we have arrived at the late 30s, and it’s not stopping there. How could something so essential become so out of reach? There’s a lot to discuss here as we tackle how things got this way and how first-time homebuyers are combating this issue.
The Generational Crisis
To understand why the housing market is like this, we have to look at who is staying put. For those who secured those sub 4% mortgages not too long ago, they aren’t even thinking about leaving. Selling their home to relocate would mean giving up that great rate and sacrificing it for a hefty borrowing cost. So, they feel forced to stay exactly where they are, even if they want to leave.
At the same time, baby boomers are living longer lives and holding onto their large family home deep into retirement. They have massive equity, their mortgages are paid off, and downsizing into today’s rates would make very little sense for them. While it’s easy to point fingers, they are mainly acting on the same self-interest that everyone would. Regardless, this means the old way of doing things with starter homes has gone stagnant. The demand isn’t lacking, but rather, the supply isn’t matching because the crucial element of movement in this market is absent.
Take It or Leave It
Instead of waiting for an economic correction that may not arrive, younger buyers are taking matters into their own hands. The first approach is geographical. While buying a home in a big city is a pipe dream for most, buyers are setting their eyes on smaller, but still culturally rich cities, where home prices sit below the national median. Instead of New York, Los Angeles, and Boston, they are opting for places like Pittsburgh, Detroit, and Cleveland.
The second approach is getting a fixer-upper. Now that move-in-ready suburban homes have become a luxury, people are looking for places they can snag for a good price but have to put in the work for. While it would be nice to get an HGTV-esque, marble countertop, open-concept type of home from the get-go, opting for homes that have seen better days may be the only option right now. At least for people like this, they don’t want to wait around. They want to get on with life, so while doing a home project like painting or ripping up flooring may feel tiring and unfair, they’d rather do this than the alternative.
Building Capital
While those two options we just discussed are viable for some, the state of the economy has unfortunately not even allowed the thought of owning a home to enter people’s minds. Because the gap between saving a down payment and rising property values is always moving, where you hold your money while you prepare to buy matters just as much as how much you set aside each month.
Letting your cash sit in a standard checking account means letting it lose ground to inflation. Placing those funds into a high-yield savings account provides you flexibility and quick access when the right time pops up, while using a short-term certificate of deposit can lock in a guaranteed return while you spend a few months shopping the market. The interest earned is capital you didn’t have to work for, giving a slight edge and some breathing room when handling a down payment or moving costs. But this may be getting too far ahead. For those just looking to save, check out our blog on budgeting that we put out at the top of the year. For more information on the additional costs when it comes to homeownership, read this.
Where We Come In
Partnering with a community bank is a game-changer. When big/national lenders look at the market, they apply rigid, automated numbers that often neglect unconventional or young buyers. We do things differently by looking at the actual math behind the application for a loan. Because we are rooted locally, we also have access to state and federal programs designed to bridge the gap.
For one, we work closely with programs like the Michigan State Housing Development Authority, which offers a down payment assistant program that has the potential to cover up to $10,000 in upfront costs. And for first-generation homebuyers, Home Boost gives specialized grants up to $25,000. Assess the parameters; it could be structuring a 15-year fixed mortgage to help you build equity at an accelerated rate, using a rate buy-down option to lower your initial monthly payments, or looking at local grants. We are happy to help you figure out your path to homeownership.
All in all, navigating the modern housing market has required buyers to pivot. Patience is required for fixer-uppers, and discipline is required for saving. While we don’t know what the future holds, the long game seems to be the plan. But once you own at least something, your equity begins to move with the market. Despite current circumstances being rough, you just might be able to have a home within reach with the right combination of savings, a local banking partner, and endurance.
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DISCLAIMER
The views expressed are those of the author and are intended for general informational purposes only. This content should not be considered financial, legal, tax, or investment advice.
Readers should consult a qualified professional before making financial decisions, as individual circumstances vary. Nothing in this article constitutes an offer or recommendation of any specific product or service.