You Can't Afford To Buy A House

How becoming a homeowner is harder than ever.

HOUSING IS NOT AFFORDABLE

My wife and I bought a home in the middle of this year. We didn’t get the coveted 3% interest rates OR the low prices. We bought in July of this year, just prior to making a cross-country move. We got the higher prices that the market was dictating AND the rising interest rates. Even with our great credit, incomes, and savings, along with no debt, the cost of being a first-time homebuyer was still substantial. Between the down payment and closing costs, we had to have a nice chunk of change to make the transaction happen. This said, I can’t imagine how this housing market is/has been for those with lower incomes, less savings, and large debt loads. If average homes aren’t affordable to the average American, we have big problems.

At the end of the second quarter of 2020, the average sales price of a home in the U.S. was $374,500. At the end of the third quarter this year, that value reached $542,900! That is nearly a 45% increase in the price being paid for a home on the market, in just over 2 years. I cannot stress this enough, but the pandemic (and the subsequent loose monetary policy by the Federal Reserve) threw the housing market into a frenzy that has still not subsided. The American with aspirations of becoming a homeowner one day likely had those hopes either deferred or semi-squashed over the last few years. Regardless of your financial position, buying a home got more difficult as prices rose, but it is even worse if you are the average individual with average income, average debt, and average assets. This said, being a homeowner is VITAL to the wealth-building process for most Americans, therefore I want to help you navigate this crazy housing environment we find ourselves in.

THANKS, FED!

If there is any one thing we could point to as the reason for large value increases in the housing market during the pandemic, the policy of the Federal Reserve is at the front of the line. Similarly, the Fed is also the current cause for higher monthly housing payments for new buyers and a decrease in housing prices that is coming (or is already here). In response to the COVID-19 pandemic, the Fed dropped interest rates to rock-bottom values. Therefore, everyone ran to refinance their homes at lower rates or buy new homes, given their greater affordability with the lower rates. This led to prices skyrocketing, and now that the Fed is increasing interest rates in response to inflation, housing affordability is as low as ever. Housing prices have fallen very little nationwide, but the monthly payment associated with new mortgages has blown up.

For instance, if an individual financed a home for $400,000 at the beginning of this year with a 3% interest rate, their payment on a 30-year mortgage would be $1,686/month before taxes and insurance. That same home (given the same price) today would have a mortgage payment of $2,859! This is HUGE! This means that if the person buying the house at the beginning of the year were wanting the same payment on a home now, they could only afford a $236,000 home, not their $400,000 chateau. This is directly due to the Fed, and it has made housing extremely unaffordable for most. Heck, my own house payment would be nearly $400/month more if I bought my house today, instead of a couple months ago! This is out of the control of buyers, sure, therefore aspiring homeowners must take control of the controllables to ever be homeowners. Don’t worry about the Fed or rates. Worry about growing your income, controlling your expenses, and saving up a down payment.

TOO MUCH DEBT

What can you control? You can’t control mortgage rates. You can’t control housing prices. You CAN control your income, your savings, and most of all, YOUR DEBT! Americans live paycheck-to-paycheck, generally, because they have too many debt payments to service. When you HAVE to have the newest/nicest things, debt will commonly follow. Making more money is a great way to afford more house, but if your lifestyle creeps with your income, it will not matter as much as reducing your debt loads will. If you were to pay down or pay off your debts, you would have more income to spend on discretionary things OR more income that could be used on a mortgage payment or down payment.

Of course, you don’t want to stretch your income as thin as possible, but decreasing other debts will open the door to your ability to pay a mortgage on homes with increased prices. Not only will debt payoff help with affordability, it can also help out your credit score, which will assist in your ability to get a mortgage at the most advantageous rate. Debt payments make up 9.5% of the average American’s income. If you made $75k/year, that’s almost $600/month! Paying these debts off can open up your income to paying a mortgage on an asset that you can build equity in and that will (hopefully) appreciate over the long-term.

DON’T GIVE UP, BUT DON’T GET DESPERATE

Something we have all seen in the past few years is people doing crazy things to get a house. Whether it be buying the absolute most house they could qualify for or offering 25%+ over asking price to buy a home, desperation is very synonymous with stupidity. If you don’t feel like you can afford a home, definitely DO NOT do crazy things to try to get into one. Buy what you can afford. Get out of debt, so that you have more discretionary income. Save money to have a good down payment (this will decrease the size of the loan you need to take). Get the lowest interest rate you can, but know that you can’t control what rates are at any given time.

I believe the average American CAN save up to buy a home. I did, and even though it took time, patience, and lots of good financial decisions, it was doable. If this is a goal of yours (it should be), you can do it too, but you have to do other smart things in your financial life to get to the point where you can responsibly buy a home. Don’t get desperate. Follow sound financial principles (live on less than you make; get out of debt), and work diligently toward your goal. You may not be able to afford a home today, but that won’t last forever, as long as you are determined to make it happen. It is not easy, but it will be worth it!