Evidence continues to pile up that buying a home has become too expensive, leading some to believe that the American Dream of homeownership is slipping away.
Exhibit A is a new study from Redfin stating that U.S. homebuyers need an income of $107,281 to purchase a typical home. The report also noted the median monthly payment for a new home is $2,682, as of October 2022.
“The income required to buy a home then skyrocketed in 2022 as mortgage rates rose at their fastest pace in history, reaching 7% by the end of October (up from 3% in January),” The study noted. “Home prices also continued to increase for much of the year, though they’ve now started declining from their peak and year-over-year growth has now slowed to around 3%.”
Why Are Homes So Expensive?
Real estate experts say the reason home prices are so high is climbing mortgage rates.
“Rising mortgage rates have impacted the amount of house that buyers can afford,” said Orchard Mortgage chief financial officer Sean Roberts. “Looking at a typical family with $125,000 of household income, in January, a 3.2% 30-year fixed rate conventional mortgage with a $2,400 monthly payment would have given that customer the capacity to qualify for a $660,000 mortgage and afford an $825,000 house (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 house (with a 20% down payment), while keeping up with the same monthly mortgage payments, Roberts said.
“That’s effectively a 28% reduction in purchasing power, which is material to these prospective homebuyers,” he noted.
The home affordability issue is particularly tough on new home buyers.
“It is hard for buyers today, especially first-time homebuyers, to save enough money for a down payment and closing costs,” said William Raveis Mortgage regional vice president Melissa Cohn. “Even with the ability to put down as little as 3% -- and in some cases, 0%, it’s difficult to have enough money for closing costs and the required cash reserves to get approved for a mortgage.”
Consequently, it's taking longer than ever to save enough money to land a new mortgage.
“We see the average age of a first-time homebuyer has increased as a result,” Cohn told TheStreet. “Those who are lucky enough to get money from family or have equity built up in a current home definitely have an edge today.”
Home Saving Tips For Tough Times
The silver lining on housing affordability is that tough economic times don’t last forever. That’s why it’s still a good idea to save for a down payment and buying costs.
“One of the best ways to build up wealth over time is by buying a home,” Robert said. “That’s been true for decades and remains true going forward. “
Start the home-buying process from the bottom if you have to. Even if it’s not your dream home, a starter home is a great way to start building the equity you need to later upgrade to a bigger property.
“There’s an adage in real estate that says, 'marry your house, date your mortgage',” Roberts noted. “This means that homebuyers should be prepared to have flexible mortgage financing that can allow for a low-cost refinancing when and if mortgage rates move lower in the future (which is what the market is currently expecting in late 2023 and beyond).”
To help homeowners out, Orchard Mortgage is currently offering a no-fee "refi for life” option that allows homeowners to easily refinance their mortgage when interest rates slide down again.
Americans saving for a new home have to start thinking creatively, too.
“Someone interested in buying a home and thinking about saving money should give their budget a second look,” said Coldwell Banker Warburg real estate broker Mihal Gartenberg. “Most of the time, the big line items are constant and fixed. Buyers should start looking at the smaller purchases and treats and reconsider them.”
To save money that’s otherwise going to rent, home savers could consider moving in with family or friends for the short term. “That way you save on rent for a down payment,” Gartenberg said.
The reality is that buyers are truly not boxed out of buying a decent home, but they may need to consider how they should compromise during their search.
“Buyers should try not to extend themselves too far beyond their means, but there is a way for any motivated buyer to find a decent home and close on it before the year ends,” Gartenberg said.
