Spring Thaw for Housing?

Real estate has frustrated would-be buyers since it exploded during the pandemic. The median U.S. home price in February was $425,061, up by 45.3 percent from $292,473 five years ago, according to real-estate brokerage firm Redfin. As a comparison, over the same five years, inflation has increased by 23 percent, which means that home prices have risen at roughly two times the overall pace of inflation.

Adding to the pain of high prices is the fact that mortgage rates have also jumped. In March 2020, the average 30-year mortgage rate was 3.3 percent and today it’s 6.7 percent. Tack on rising homeowner’s insurance premiums and property taxes, and you can see that the cost of carrying a house is steep. Amid this affordability crisis is a slight glimmer of hope. Just in time for the spring selling season, there is evidence that the rate of home price increases is slowing down, as new listings increase.  

If you are preparing to take the plunge, start by running the numbers. Make sure that you have an adequate downpayment, although you may qualify for a downpayment of less than 5 percent for some loans, it is more prudent to have at least 10 percent and ideally, 20 percent. Some would-be buyers are thwarted at this first step. According to a Bankrate survey, 78 percent of aspiring homeowners earning $100,000 or more annually say the expenses from down payments and closing costs are a significant obstacle to affording a home. (Contrary to articles like this one from New York Magazine, most parents are not able to “gift” their kids big money towards home purchase down payments!)

Next, start figuring out what kind of mortgage could work for you. One sign that you might not be ready to buy, is if the only way you can purchase the house is by keeping your fingers and toes crossed and hoping for a refinance to a lower rate. Run the numbers with a 30-year fixed rate loan, and be realistic about your job security. I have heard from a lot of government employees who have found themselves suddenly out of work but still having to pay the mortgage.

With your basic estimate of the monthly nut for your dream home in hand, you need to see if your cash flow can absorb the purchase. When I was a financial planner in the 1990’s, we relied on the “28/36 rule”, a shortcut that recommended that consumers should spend no more than 28 percent of gross monthly income on housing and no more than 36 percent on all debts.

Given today’s higher prices, those rules might be somewhat limiting. Another way to think about a purchase is to ask yourself, if you were to buy, would you be able to afford your ongoing monthly costs, and could you continue funding long term goals like retirement and college tuition? If the answer is NO, then you may be overextending.

Finally, if the whole process is getting you down, remember that owning a home is not the only way to accumulate wealth. Renters can use the money that they would have spent on a downpayment, mortgage, taxes, insurance, and ongoing maintenance and instead make it available to save and invest for the future.