It’s tough to find an affordable home these days. But a traditional mortgage isn’t the only game in town. Check out these creative alternatives.Full article
High prices, stuck wages, debt. What can a homebuyer do?
February 26, 2018
In many parts of the country, you don’t have to scroll the real estate listings for long before you start thinking, “Dang, there’s almost nothing I can afford!” This may not be much comfort, but it’s not just your problem, it’s America’s problem: averaged nationally, home affordability is at its lowest in 10 years. Ouch.
Why exactly are homes so expensive? Understanding the forces working against you as a homebuyer is part of putting together your personal action plan. To help you get started, we’ve outlined five of the toughest obstacles to affording a home — and potential strategies for getting around them.
And by the way, some of the trends that are making the real estate market so tough for first-time homebuyers might be starting to turn around. So if you can’t find a strategy that works for you right now, keep saving money and building your credit score. Your day will come!
1. Rents are so high, it’s hard to save. But there’s down payment help.
You might be all too familiar with sky-high rent, but what’s going on?
Demand for rental housing has grown at an unprecedented rate for more than a decade, according to Harvard University’s Joint Center for Housing Studies. That’s been driving up prices. The apartment-hunting website ABODO says that in 2017 rents went up yet again in 28 states. Yet the trend might be slowing down: rents dropped (a little) in 21 states. (In case you did the math and were wondering about that 50th state, it’s South Dakota that stayed the same.)
Strategy: Take advantage of down payment assistance
A 20 percent down payment is great if you can do it. It will keep your monthly payment down and save you money on mortgage insurance and interest. But it’s a myth that you need a 20 percent down payment. In fact, some loan programs, such as Fannie Mae's HomeReady, let you put down as little as 3 percent. Our online homebuyer course qualifies you for HomeReady and others. And there’s all kinds of assistance available for that 3 percent. Thankfully, Down Payment Resource reports that funding for these programs remains strong for 2018.
Read our beginner’s guide to down payment assistance. You’ll feel better!
2. Wages are hardly budging. But land trusts are keeping homes affordable.
One of the more positive developments for wages lately is a tightening labor market. Unemployment is relatively low overall, and it looks like it’s going to stay that way for a while. Which could mean upward pressure on wages and more money in your pocket.
That’s good news, but the larger context is not super encouraging at the moment.
According to Census Bureau data, the fact is that after adjusting for inflation, Americans age 18 to 34 earn $2,000 less per year today than they did in 1980. Seriously. In the late nineties, real average hourly wages for young college graduates saw an upward spike, but the Economic Policy Institute reports that it’s been pretty much downhill since 2000. In 2017, American wages inched up on average, yet it’s way too early to call it a trend. Even if it is, wages obviously have a lot of catching up to do.
Strategy: Find a community land trust property
Nonprofit community land trusts make buying more affordable by selling you only the building. You get a long-term lease for the land. This kind of ownership is a little complex, but it can get you into a nice home — and you’ll be part of a nationwide movement that’s helping communities to provide permanently affordable homes.
Learn more about this and other creative ways to become a homeowner.
3. With demand high, prices are still rising. But not everywhere.
The huge millennial generation is starting to get married, have kids, and buy homes. (Not necessarily in that order.) That’s a lot of demand. Couple that with the shortage of starter homes, and it’s no wonder that home prices have been climbing faster nationally than wages, salaries, and inflation. Home prices have gone up for 23 consecutive months, Forbes reports. And from January 2017 through October 2017, the industry’s go-to price index climbed nearly 6 percent, the biggest gain since 2013.
After surveying more than 100 housing experts and economists, Zillow predicts that home prices will rise by about 4 percent in 2018. Property data company CoreLogic predicts 4.7 percent. That’s faster than the 3 percent annual increase that’s considered typical, but slower than the current breakneck 6.9 percent.
The good news is that nearly half of the nation’s 50 largest housing markets, and 36 percent of the 100 largest, are “overvalued,” according to CoreLogic. Meaning that their home prices aren’t sustainable for the long term. When too many people simply can’t afford to buy, prices start to come down, and maybe we’re at that point.
Strategy: Move to a more affordable market
If half of the nation’s largest housing markets are overvalued … that means half aren’t. So consider turning your homeownership journey into even more of an adventure with a budget-friendly change of scenery.
Check out these 10 cultural hot spots you can afford to live in — underappreciated cities that will satisfy your cravings for art, music, food, and an affordable place to call your own. Or explore the new “urban ’burbs.” These days, it’s not just big, expensive cities that offer diverse, walkable neighborhoods with groceries, restaurants, great friends, maybe a live music venue, and even your job all within a few blocks.
4. Student debt can make homebuying hard. But a better payment plan helps.
The student debt situation is only getting worse: the average Class of 2016 graduate has more than $37,000 in student loan debt, 6 percent more than the Class of 2015. Lenders are always concerned about a homebuyer’s ratio of debt to income. In short, when debt payments eat up too much of your monthly income, it’s hard to qualify for a mortgage loan.
Strategy: Try to lower your monthly payment
When it comes to qualifying for a mortgage, the total amount you owe is less of a problem than your monthly payment. For lenders, it’s all about that debt-to-income ratio we were just describing. Fortunately, there are a variety of ways to lower your monthly student loan payment. An income-driven repayment plan, for example.
Just be aware of the potential drawbacks of any plan you consider. Sometimes you can end up paying more for your loan in the long run.
Learn more about ways to rein in your student loan payment, and all the pros and cons of each, at Student Loan Hero.
5. Starter homes are hard to find. So why not DIY a new home or a rehab?
Some observers of the real estate industry have been using the word crisis when they talk about “inventory” — the number of homes available to buy. According to Zillow, there are 12 percent fewer homes to choose from than there were a year ago, when the market was already tight. And the biggest pinch is in starter homes: those priced in the lower third of their local market. What’s going on?
First, hardly anyone is building affordable homes. Partly because of rising labor, land, and material costs, and sometimes local regulations against density, construction companies have focused on more profitable higher-end homes and rental apartments. Plus, in 2017, a lot of resources went to rebuilding thousands of homes destroyed by natural disasters.
With demand so high, it looks like builders are finally getting interested in entry-level homes again. But those homes probably won’t start hitting the market until 2019. You’ll probably see them in the suburbs, where building costs are lower.
Second, lots of single-family homes got turned into rentals. The 2008 housing crash feels like forever ago in some ways, but its impact is still very much with us. One thing that happened was that institutional investors swooped in like vultures. They bought undervalued and foreclosed homes and turned them into rentals. Reuters reports that nearly 20 percent of all homes priced under $300,000 that aren’t owner-occupied are now owned by corporations or companies. Kind of shocking, right?
Strategy: Find a DIY opportunity
Reach out to Habitat for Humanity, which partners with low- and moderate-income households that are up for rehabbing or building their own home, with a Habitat work team’s help. Or consider shopping for distressed properties (short sales, foreclosures, or bank-owned homes). They’re often fixer-uppers. Buying a distressed property can be risky, though, so try to work with a specialized real estate agent.
Learn more about these and other creative ways to become a homeowner.
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Filed Under: For Homebuyers