Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Dale in OH: Hi Brian, I’m a terrible procrastinator! My finances say that I’ve had the ability to buy my first home since June, but my head is saying something different. My small group of friends, in their early 30s, spent much of the summer house hunting and dealing with mortgage applications. First in August and again two weeks ago, I spent my weekend helping two of them move into their first homes, and a third hopes to close by the end of September. What’s wrong with me? I have the ability but still can’t seem to make what might be the most important decision of my life so far. I’m a 32-year-old man with a solid career.
Answer: Hello Dale. Your hesitancy is very understandable. This year’s housing market continues to be a perfect storm of the good (historically low-interest rates), the bad (high demand with many more buyers than sellers), and the ugly (rapidly escalating home prices causing bidding wars). I can’t tell you if your reluctance is good or bad but maybe I can point out a few things for you to think about and give you a couple of questions to ask yourself that will help focus your decision.
First, do you share the American dream of homeownership? Before answering that think about this, according to a consumer finance survey by the Federal Reserve, homeowners have 40 times the household wealth of renters. For most Americans, the majority of their net worth is tied to the value of the residential property they own. Buying a first home is a financial risk and should be well thought through but it is also the first step that most young people take to building a secure financial future.
Dale, affordability is a very important factor, but you say that your finances support buying a home today. Unless you are confident that your income will significantly increase soon and/or you don’t mind paying an even a larger percentage of your income for a mortgage, you should consider that affordability isn’t likely to improve in the near future. There is a well-documented shortage of single-family homes. All indications are that home prices will continue pushing up to the edge of affordability. Besides a down payment (that it sounds like you have) the other component to affordability is mortgage rates. Right now, interest rates remain close to 3% with most indications that increases are coming. Along with rising home prices, other factors (down payments) show that the total cost of buying a home is most likely to be more expensive at least the rest of this year and well into next year.
None of this means that today’s first-time buyers don’t have some regrets. With very few houses on the market, bidding wars often lead to a quick purchase decision that can also lead to buyer's remorse. A May 2021 Bankrate survey found 64% of millennials aged 25 to 40 had regrets after buying a home. That’s a very high number considering it’s the American Dream. The most often cited reason was settling for properties that aren’t quite right for them. It was further broken down to be both the financial and physical aspects of the property. Dale, you say your finances are solid, so sticking to your budget you should avoid financial regret. But still be wary of potential high physical maintenance costs. The survey also found that more than 26% of younger homebuyers (ages 25-31) felt the maintenance costs of homeownership is too high. One bidding war strategy is waiving the home inspection clause. I don’t think the home inspection clause should ever be waived unless you’re going to tear down the house or begin with a major renovation. The inspection clause prevents you from being surprised with big repair and maintenance costs.
Something else interesting from the Bankrate survey is that that 14% of millennials said that their house was too big. An assumption is that this is probably driven by the pandemic because people want as much social distancing after living in apartments and other congested settings. I also think part of it might be caused by the shortage of starter homes that forced first-time buyers into the larger and more expensive homes that were available. For people that can afford it, too large of a house shouldn’t be a big problem because most first-time buyers soon want to move up to a bigger home anyway. Buying a bigger house now could be a financial advantage if people stay in the house longer and avoid having to pay to take out a new mortgage in a few short years. The best approach here is probably to be sure the bigger home is in a neighborhood that you want to live in long-term.
All things considered, prices should be expected to continue going up and affordability will be further impacted if interest rates also go up. While it might not be the ideal time to buy, it looks to be the best time in the foreseeable future. Nevertheless, it’s not a suitable time for people that would have to push their budget to the cusp of financial ruin. Nor for people who can’t find a house that meets most of their needs or if the local competition is so fierce that they can’t find anything they would be comfortable living in for at least seven years (the time it typically takes to recover the cost of taking out a mortgage). The option to continue renting is still available but is not the American Dream nor the road most traveled for building wealth.
What are your thoughts about the good, the bad, and the ugly facing first-time buyers in the fall of 2021? Please comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].