House prices are going up. Here’s when you should increase your budget, and when to stick to your original price
Prior to the pandemic’s red-hot housing market, there was a simple profile that constituted an “A” buyer, according to Brian Copeland, a realtor in Nashville, Tennessee. “Four years ago, an ‘A’ buyer was someone who was pre-qualified for a loan, had 3% down and could go out this weekend and buy a home,” said Copeland, who is also president of the industry association Greater Nashville Realtors. “Now, an ‘A’ buyer has all cash.”
In addition, the top buyers today are willing to waive appraisals and inspections and, in some cases, don’t even view the house they’re purchasing in person, he said. “Everyone is being squeezed,” said Copeland, adding that middle-class affordable housing is “absolutely suffering.”
Prices are going up
Americans are aware of the struggles they face in buying a home. More than 70% of U.S. adults believe the housing market is currently in a bubble, and more than half say it’s a bad time to buy a home, according to a survey of more than 7,000 adults from MomentiveRead More : Dubai property market sees strongest ever start to a year with 12,119 transactions Price is a major factor that’s keeping potential buyers on the sidelines – some 38% said they have delayed or canceled plans to buy a home due to inflation. People of color were also more likely to push off a home purchase due to rising costs, the survey found. “More scuttled or delayed plans to buy among these groups threatens to exacerbate already wide gaps in homeownership rates along racial and ethnic lines,” said Jon Cohen, chief research officer at Momentive.
In February, the median sales price for homes in the U.S. was $357,300, a 15% increase from a year earlier, according to data from the National Association of Realtors. At the same time, mortgage rates are also increasing, which means buyers that need loans will pay more for them as well, said Danielle Hale, chief economist at Realtor.com.
That can hurt younger consumers, as well as first-time buyers, according to Hale. It also means that homeownership as a path to building wealth is now out of reach for many.
“It’s a very competitive market for those who are shopping at the top of their budgets,” said Peter Murray, a realtor and the principal broker at Murray & Co. Real Estate in Frederick, Maryland. “There’s a lot of disappointments.”
The money math
Some homeowners may be tempted to stretch their budgets to purchase a house, especially if they’ve had months of searching and being outbid. It can make sense in some cases to stretch your budget, according to Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
“There are situations when I have told people it’s okay to stretch, but just understand the impact that’s going to have on other areas of your life,” she said.
For example, it could make sense to pay slightly more if moving will lower other expenses, or if you’re anticipating lifestyle changes that will free up room in your monthly budget. This could include going from two cars to one, or having children who will soon enter public school, meaning you’re no longer paying as much for childcare.
If you’ve calculated your budget using your base salary, not including any bonuses, you may also be able to afford more, she said. And, if you don’t have consumer debt, are adequately saving for retirement and have a solid emergency fund, there may be more wiggle room than you think at first.
The amount of time you expect to spend in the home also matters. If you’re looking to live in a house for more than five years, it may make sense to pay slightly more now.
When not to stretch
On the flip side, there are some situations where it does not make sense to increase your homebuying budget.
Cheng says stick with your original plan if paying more would make it difficult to contribute to other financial goals, such as saving for retirement or paying down debt. “If the only way that stretch is going to happen is if they borrow from retirement money, I would probably say that doesn’t make sense,” she said.
She also cautioned against wiping out all your cash savings to afford a more expensive home. You need to budget for variable costs such as taxes, insurance and repairs. It also doesn’t make sense to stretch your budget to a point where you can only afford it with tax breaks, said Cheng. If those benefits go away in the future, you’ll be in trouble.
What to do if you can’t pay more
Buyers who can’t stretch their budgets have a few options.
“They either pause their home search or they need to readjust their search criteria,” said Murray.
Stepping out of the buying market might make sense for some who need more time to save. It could also be a bad idea, however — if prices continue to rise, you could be further priced out of the market, said Copeland.
That means rethinking your must-haves might make more sense. That includes looking at different neighborhoods, including ones that aren’t as popular or might be farther away from city centers. They may also need to be flexible on the size or condition of the home they purchase.
They should also have all of their paperwork ready to go so that when they do see a house they like, they can make an offer right away, said Hale. “To be competitive in this market, you could throw more money at the problem or you could be really prepared and on top of it,” she said.
Working with a financial planner or advisor can help homebuyers understand what they can really afford to spend on a house, said Cheng.
“The loan officer is going to be really helpful in helping you structure your loan, the realtor is going to help you find a home,” said Cheng. “You might think having a financial planner is over the top, but they are going to really help you see how this affects your situation.”
In addition, the top buyers today are willing to waive appraisals and inspections and, in some cases, don’t even view the house they’re purchasing in person, he said. “Everyone is being squeezed,” said Copeland, adding that middle-class affordable housing is “absolutely suffering.”
Prices are going up
Americans are aware of the struggles they face in buying a home. More than 70% of U.S. adults believe the housing market is currently in a bubble, and more than half say it’s a bad time to buy a home, according to a survey of more than 7,000 adults from Momentive
In February, the median sales price for homes in the U.S. was $357,300, a 15% increase from a year earlier, according to data from the National Association of Realtors. At the same time, mortgage rates are also increasing, which means buyers that need loans will pay more for them as well, said Danielle Hale, chief economist at Realtor.com.
That can hurt younger consumers, as well as first-time buyers, according to Hale. It also means that homeownership as a path to building wealth is now out of reach for many.
“It’s a very competitive market for those who are shopping at the top of their budgets,” said Peter Murray, a realtor and the principal broker at Murray & Co. Real Estate in Frederick, Maryland. “There’s a lot of disappointments.”
The money math
Some homeowners may be tempted to stretch their budgets to purchase a house, especially if they’ve had months of searching and being outbid. It can make sense in some cases to stretch your budget, according to Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
“There are situations when I have told people it’s okay to stretch, but just understand the impact that’s going to have on other areas of your life,” she said.
For example, it could make sense to pay slightly more if moving will lower other expenses, or if you’re anticipating lifestyle changes that will free up room in your monthly budget. This could include going from two cars to one, or having children who will soon enter public school, meaning you’re no longer paying as much for childcare.
If you’ve calculated your budget using your base salary, not including any bonuses, you may also be able to afford more, she said. And, if you don’t have consumer debt, are adequately saving for retirement and have a solid emergency fund, there may be more wiggle room than you think at first.
The amount of time you expect to spend in the home also matters. If you’re looking to live in a house for more than five years, it may make sense to pay slightly more now.
When not to stretch
On the flip side, there are some situations where it does not make sense to increase your homebuying budget.
Cheng says stick with your original plan if paying more would make it difficult to contribute to other financial goals, such as saving for retirement or paying down debt. “If the only way that stretch is going to happen is if they borrow from retirement money, I would probably say that doesn’t make sense,” she said.
She also cautioned against wiping out all your cash savings to afford a more expensive home. You need to budget for variable costs such as taxes, insurance and repairs. It also doesn’t make sense to stretch your budget to a point where you can only afford it with tax breaks, said Cheng. If those benefits go away in the future, you’ll be in trouble.
What to do if you can’t pay more
Buyers who can’t stretch their budgets have a few options.
“They either pause their home search or they need to readjust their search criteria,” said Murray.
Stepping out of the buying market might make sense for some who need more time to save. It could also be a bad idea, however — if prices continue to rise, you could be further priced out of the market, said Copeland.
That means rethinking your must-haves might make more sense. That includes looking at different neighborhoods, including ones that aren’t as popular or might be farther away from city centers. They may also need to be flexible on the size or condition of the home they purchase.
They should also have all of their paperwork ready to go so that when they do see a house they like, they can make an offer right away, said Hale. “To be competitive in this market, you could throw more money at the problem or you could be really prepared and on top of it,” she said.
Working with a financial planner or advisor can help homebuyers understand what they can really afford to spend on a house, said Cheng.
“The loan officer is going to be really helpful in helping you structure your loan, the realtor is going to help you find a home,” said Cheng. “You might think having a financial planner is over the top, but they are going to really help you see how this affects your situation.”
Source: www.cnbc.com
