When I bought my first home in 2010, at age 24, it was the Great Recession, and the housing market—the entire world, really—was off-kilter. A little like it is now.
I was newly married, a recent college grad, and I’d dreamed of getting my own place since I was a kid growing up in my parents’ 1-bedroom, rent-controlled apartment in New York City. My wife and I, despite our modest incomes, had managed to squirrel away about $12,000. Armed with that meager down payment, patience, and a blithe willingness to see past any number of imperfections and economic uncertainty, we set out on our search.
It was terrifying. We had tens of thousands of dollars in student loan and credit card debt, which we were chipping away at on a household income of less than $100,000. That would be a lot in many parts of the country, but didn’t get you very far in New York.
Buying a home was a risk in plenty of other ways, too. After the stock market collapsed, nobody knew when or how things would get better, and most people weren't buying homes even though prices had fallen sharply and interest rates were about as low as they'd ever been.
Looking back, if it hadn’t been for those conditions, I would have had to abandon my dream of becoming a homeowner. But because that dream was more important to me than the risk, I ended up with a fixer-upper of row house from the late 1800s in a middle-income neighborhood just 5 miles outside of Manhattan—where my parents were still renting their apartment.
And I’ve been obsessed with real estate ever since, both a beneficiary of and a hostage to that obsession. I’m in a constant cycle of buying, fixing, refinancing, and selling—then moving again. On Zillow, the real estate listings website, I have hundreds of homes saved, in 11 different states. (These are not mansions, but modest homes with some element of charm that I could actually see myself living in.) My real estate agent, Kathy, and her husband attended my son’s third birthday party back in October.
The current global economic crisis could end up being worse than the Great Recession, even without the grave health risks. Fortunately, you don’t have to compromise your safety to see homes for sale. The real estate industry has been moving toward online transactions for years, so it’s already geared up to accommodate social distancing, from conducting video tours to financing online without ever meeting anyone face-to-face.
The real hitch to maintaining social distancing while buying a house is the home inspection. Ideally, you want to be there when an unbiased professional assesses the condition of the house, but if it’s a health risk, you can spend more time combing through the inspection report instead.
What I can tell you from experience is that if you’re thinking of buying a home for the first time, and you have some means to do so, there are opportunities that wouldn’t have been there even three months ago. Real estate experts I spoke to have the same view.
"If you have the job and income security, there could be real opportunities coming for a first-time buyer," says Stacy Francis, a certified financial planner in Manhattan. But she recommends a cautious approach, and suggests a reserve fund of 6-12 months of living expenses in the bank before you buy. "I know that sounds like a really ideal scenario, and it is, but now is not the time to be stretched for cash."
Here are seven lessons I’ve learned over a decade of home buying on a shoestring budget, tempered with insight from real estate agents, mortgage brokers, housing market analysts, and other experts I spoke with to help you avoid some of my mistakes (one involving a rather unfriendly pitbull) in your own search for your first home.
In a typical market, you’re at a disadvantage as a first-time homebuyer. You probably have less savings for a down payment, college debts, and maybe a sub-optimal credit score because you’ve got a shorter credit history and because your debt-to-income ratio is high. But, to be brutally honest, youth can be an advantage at a time when older buyers may feel safer sitting on the sidelines.
If you hold on to your first house for a while, chances are good it will be a smart long-term investment. Home values increase, on average, about 3 to 5 percent each year, though your location can make a big difference. Values in popular real estate markets recovered from the Great Recession after just a few years, and a full 80 percent of the market had recovered within a decade. And if you’re young, you’ve got the time.
Remember that fact, and let any concerns over short-term projections keep other buyers at bay.
Scanning reports from real estate companies like Zillow, Redfin, and StreetEasy, it seems prices might drop somewhere between 0.5 to 2 percent in the next 12 to 18 months. (“Might” being the key word in this uncharted territory.) That’s not a huge swing by historical standards, but a discount is a discount.
“We’re certainly not seeing any kind of panic selling or huge price drops,” says Manning, the agent from Seattle. But there have been opportunities. “We had a client whose budget was keeping him about 10 miles from the center of town, but we were able to help him nab a place only 4 miles from the downtown in the last few weeks.”
Even amid a global pandemic, don’t expect to be the lone shopper in San Francisco’s Mission District or the West Village of Manhattan. Instead, seek out undiscovered or unfamiliar neighborhoods. Most people aren’t natural risk-takers, and buying in an area that doesn’t have a lot of buzz—at a time of great uncertainty—is more than a lot of folks can stomach. It’s how I got a foothold in the real estate market.
“It’s almost always true that you’ll get more for your money if you leave a prime neighborhood,” says Gina Lorenzo, a Realtor in the Charlotte, N.C., area. “In our area, if you’re willing to go 45 minutes outside the downtown, you can get a house for $350,000 that might be priced in the $600s nearer the heart of the city.”
When I went house hunting in 2010, I already knew my $300,000 budget provided basically zero options in Manhattan because I’d been scanning local listings long before I could start shopping. Then I finally listened to a friend who kept gushing about a neighborhood in Jersey City, where my budget could get me a three- or four-bedroom house, possibly even a two-family with rental income, provided I was willing to do some heavy-duty renovation.
Granted, there were some harrowing moments in our hunt for houses in disrepair: I encountered backyards littered with beer bottles and syringes, and on one occasion, a pitbull chained to a staircase. I toured a 12 1⁄2-foot-wide two-bedroom row house where I felt like I could practically touch the two opposing walls if I stretched out my arms; it was even more claustrophobic than the apartment I’d grown up in.
I saw close to 40 houses in six months before I found a place I wanted and a seller willing to accept my full-price offer secured by a modest 3.5 percent down payment. If I’d never extended my own search outside my dream Manhattan neighborhoods, I’d probably still be searching for my first house.
In times of uncertainty, flexibility can be worth more to a seller than squeezing every last penny out of a sale. There are other ways you can sweeten the deal. You could accept a distant closing date, wait to have a home inspection until the seller is comfortable having people in her house, or even let them rent back the house from you until the quarantine ends.
Me, I made two major concessions to the seller of my first house. One, I agreed to take over a four-year contract on the home’s security system, and two, I vowed to keep the existing tenants on the top floor for a year. That gave me a leg up over other buyers, including a couple who actually offered more money. (The tenants were identical twin boys who were professional hip-hop dancers, and they practiced at all hours of the night. Plenty of sleep was lost. But they’re now the two principal dancers for Ariana Grande, and if I hadn’t taken a chance, I probably would’ve missed out on any number of fascinating stories involving Janet Jackson, Kelly Rowland, and Nicki Minaj.)
Depending on where you live, you may not even be allowed to see a house in person during the pandemic.
“We now start with a virtual showing,” says Manning. “We explain to clients that these tools have gotten really good. We can even analyze interior photos to pinpoint things like the height of a ceiling in a finished basement without ever needing to tour a property in person.”
Manning says people are also using digital notaries, and even close via web conference. Other agents I spoke to said the same thing. “I’m telling my first-time buyers to use every tool at their disposal, like maps, street views, and virtual showings,” says Lorenzo, the agent in Charlotte. “Anything that can help you research a property and get ready to make an offer while some buyers may be sitting on the sidelines.”
Virtual showings can help you get a decent sense of a house when you can’t go in person because of social distancing rules. If you like a house, you can do background research about things like square footage, layout, schools, and taxes so that once showings resume, you can simply walk through and beat the competition by making an offer if it shows as well in person. And bear in mind that you might still be able to see the house again during the home inspection or at least know whether it’s in good shape from the inspection report—and rescind an offer if it has any major problems.
Your agent is your advocate, and your link to the seller. Make sure to find an agent whom you connect with, and who really takes the time to understand you. Particularly in an uncertain market, you need an agent who goes above and beyond to work within the limitations of a quarantine order. “I always like to say that, as agents, we deal in people more than we deal in real estate,” says Manning.
For instance, how well he knows a buyer informs how he videos a house, something he’s been doing to eliminate the need for initial showings. “If I know you detest popcorn ceilings, I’m going to make sure to get the ceiling from every angle,” he says. “That kind of thing just has so much more credibility than an over-produced video you’d find online from a listing agent.”
My own local agent, Kathy, has been invaluable with aspects beyond getting a good deal. For instance, she’s smoothed over permitting or certificate of occupancy issues with the town building department.
Fostering a good relationship with your agent can even give you a jump on listings. “In our multiple listing service, we can actually see future listings before they’re available to the public,” says Lorenzo. And though an agent may not be able to share an entire listing before it goes public, they may be able to queue up a virtual tour by going early to shoot a video of the interior for you, or even prepare a tentative offer so that you can strike quickly once the house is listed.
Look for an agent who listens, without rushing you off the phone. Are they showing you houses that are in line with your budget and your needs? You want someone who stays in touch with you and alerts you to properties as soon as (or before) they come on the market. If you find someone who seems to be always encouraging you to make an offer on a house, find someone else—he just wants to make a quick sale.
Getting a mortgage can seem overwhelming to first-time buyers even during ordinary times. And since the beginning of the pandemic, we’ve seen wild volatility in interest rates. My longstanding mortgage guy, Marc Camp, describes a mix of sheer chaos and unprecedented opportunity for borrowers right now. “In my entire career, I’ve never seen anything like the current mortgage market,” he says. “In the last six weeks, we’ve seen rates at their lowest levels in history. But we also saw rates shoot up by a point in less than a week.”
Camp explains that the ups and downs are, in part, due to the fact that more people are refinancing their current mortgages trying to get a lower rate, and that demand can push rates higher at times. Still, rates remain very low by historical standards, currently around 3.55 percent for a 30-year fixed mortgage.
Conventional wisdom says putting a 20 percent down payment on a 30-year fixed mortgage is the safest option when it comes to mortgages—you often get the lowest rates and your payments are the same every month for as long as you have the loan. But the reality is, first-time homebuyers typically don’t have that 20 percent down payment.
But there are loans that are geared to first-time homebuyers with small down payments. You have to pay mortgage insurance or PMI every month, though, which protects the bank in the event you default on your loan. The amount you pay in PMI varies depending on your loan terms, but generally, figure paying around $80 per month for every $100,000 you borrow. It’s crummy to have to pay that extra money, but on the other hand it could take you decades to save a 20 percent down payment.
The trick that I’ve used to my advantage more than once is to make a small down payment, then get rid of PMI quickly. That only works if you still have a sum of money left over after you close on your house. Let me explain.
If you put down a smaller amount—you can go as low as 5 percent with a conventional loan—you can use the money you saved on a down payment to fund a renovation. If you bought a fixer-upper and the renovation adds significantly to the value of your house, you can get the house re-appraised and ask the bank to drop the PMI.
Responsible me wants to remind you that even in the best of times, things can go wrong with real estate transactions. And they often do. We’ve entered unchartered territory as a country, and everyone I’ve interviewed from lawyers to lenders are trying to adjust. That can translate into delays. We asked CR members in the process of buying their first home to share some of their stories with us on Facebook. We’ve heard of people’s home buying process stymied by closed co-op boards, home inspectors who can’t enter a property, and sellers asking to rent their own houses back for months after a closing.
Our best advice is to hire a seasoned real estate lawyer who can help you navigate these circumstances. He or she will be able to draw up contracts for any number of contingencies, and protect you if circumstances change.
One last thought: There are reasons, far beyond financial practicality, that are equally important for buying a house. I felt stunted by renting. I wanted to renovate spaces and plant gardens, and build a basement workshop, none of which was possible as a renter. I wanted to put down roots but felt like rents would continue to climb forever, forcing me farther and farther from the city that I loved. So while you can research the future of the housing market, and mortgage rates, and the economy as a whole, endlessly, only you can gauge whether this is really the right time to buy your very first home.
That’s a deeply personal question, but I’ve always found that tumultuous times can bring about positive change in life, leading me to believe that a downturn, regardless of its cause, may be the best opportunity you’ll ever have to get your foot in the front door of your new home.
Lessons I learned buying my first place during the Great Recession
By Paul Hope