Buying in the midst of an affordability shortage? Here’s how homebuyers can cope

The housing market caught fire in 2020 as Americans decided en masse that they wanted homes and were ready to afford them.

Two years later, the pandemic-era housing boom continues to rage. Home prices set one record after another. Bidding wars have become the norm in many markets.

While the sustained price spike is good news for home sellers, it’s not so good for buyers forced to pay prices that would have been unthinkable a year or two ago, and even circumvent warranties. basis such as valuation waivers and inspection clauses.

Soaring prices are not the only factor pressing buyers. There’s also the dramatic rise in mortgage rates, which have jumped more than two percentage points since the summer of 2021. This means buyers can no longer afford as many homes as they once could. The National Association of Home Builders estimates that less than half of homes sold in the United States are within the budget of a family with a median American income of $90,000.

“Affordability issues continue to escalate as rising interest rates and building material costs, which are up 20% year over year, drive housing costs up significantly. faster than wages,” said Robert Dietz, chief economist for the National Association of Home Builders. .

58% of all American adults would be willing to take steps to find more affordable housing, such as leaving the state (27%), buying a repairman (21%), moving away from family and friends (20% ), get away from work (13%), move to a less desirable area (11%) and/or take another action (3%). Seventy-five percent of Gen Z (18-25) and 69% of Gen Y (26-41) would take at least one action to find more affordable housing, compared to 59% of Gen X (42- 57 years old) and 41 years old. % of baby boomers (aged 58-76).

Despite the tough conditions, millions of Americans will buy homes this year. If this describes your situation and you’re struggling to buy a home, here are some tips and tactics to help you navigate a tough market.

Think long term and be realistic

Yes, the big jump in house prices reminded many of the housing bubble of 2005-2007. However, housing experts say any downturn is unlikely to mimic the last crash, which saw home values collapse. This time around, prices should flatten or dip rather than plunge.

To protect against a downturn, don’t buy a home unless you plan to keep it for at least three to five years. Remember that with rare exceptions, residential real estate retains its value over the years.

“A house is a very good investment,” says Alec Hartman of Welcome Homes, an online home building platform. “Furthermore, a mortgage is a forced savings plan.”

In other words, as you make your monthly mortgage payments, you allocate a portion of each check to your own home equity. All of these factors should help ease your fears of buying in boom times.

After two straight years of double-digit price appreciation, most housing economists agree a downturn is ahead.

“Don’t bet on further house price appreciation as if it were a birthright. It’s not,” McBride says. “Values ​​can drop in very large areas and for most other areas, home values ​​may not change much, if at all, over the next three to five years.”

Get fully pre-approved for a mortgage loan

Even if price appreciation slows in the future, that does not change the current reality: affording a home is not easy. For sellers to take your offer seriously, you’ll need to show that you’re a serious buyer by showing proof that a lender has checked your finances and pre-approved you for a loan.

“It’s a staple in this market,” says Deaton. “For a seller to even consider, we have to be very strong.”

It’s also important to refresh your pre-approval to reflect today’s mortgage rates. Because it’s so hard to find a home now, many buyers are forced to spend months looking, and during that time mortgage rates have risen sharply.

Look for a low payment loan

For borrowers struggling to afford a home, the monthly payment is just one hurdle. Another comes with a down payment. With a typical American home selling for around $375,000, a 10% down payment means writing a check for $37,500, which is a tall order in a country where many consumers don’t even have enough money. emergency savings to pay for an unexpected expense of $1,000.

There is a potential workaround, however, in the form of mortgages backed by the Federal Housing Administration and the US Department of Veterans Affairs.

FHA loans and VA loans have less onerous restrictions than conventional loans. While the standard down payment is 20%, VA loans require no down payment and FHA loans have a minimum 3.5% down payment.

For conventional loans, the best mortgage rates go to borrowers with credit scores of 740 or higher. But VA and FHA loans offer competitive rates for borrowers with credit scores in the 600s.

Consider a repairman

For buyers frustrated by the lack of inventory and skyrocketing prices, older homes can be a good compromise. In Bankrate’s survey earlier this year, 21% of respondents would try this tactic.

Of course, buying a repairer means you are undertaking a project, which brings uncertainty. No matter how careful you are in estimating your renovation budget, you can count on surprises, especially in a time when material costs are volatile and construction labor is scarce. Renovation experts say you should plan for cost overruns in the range of 15-20% of your construction budget.

An FHA 203(k) loan helps cash-strapped buyers afford a repairman. This type of loan allows you to consolidate the purchase price and renovation costs into one mortgage loan.

Consider moving to a less expensive neighborhood

Many buyers are faced with the harsh reality that they cannot afford to buy in the neighborhood they really want. In some cases, buyers decide to leave the most difficult markets.

In Bankrate’s survey, 27% of American adults said they would consider leaving the state and 20% would move away from family and friends. By region, Americans living in the West (33%) and Northeast (31%) are more willing to leave the state than those in the Midwest (25%) and South (22%).

The rise of remote work is making affordability-driven migration more attractive. While Silicon Valley and New York once attracted workers seeking higher wages, many employers are now letting employees work from home.

Every accessibility compression workaround has its drawbacks. This strategy is difficult, as you will potentially have to leave behind your family and friends and the support they provide for things like childcare.

Another catch: the more expensive markets have rewarded owners with solid appreciation. Cheaper markets, while affordable, create less real estate wealth.

Plan a bidding war

In normal housing markets, bidding wars are rare. In today’s housing market, desperate buyers are paying thousands, if not tens of thousands of dollars above the asking price.

“Go in with the expectation that you’ll get into a bidding war,” Deaton says. “It’s not a ‘Maybe you will, maybe you won’t.’ You will be.”

To avoid getting caught up in the emotions of a bidding war, start with a plan. In the heat of battle, it’s easy to dramatically increase your prize just to try to win. Before you get into a bidding war, set a clear cap on how much you’re willing to bid for the property and stick to it.

Deaton suggests including an escalation clause with the offer. It’s a bit of legal language that strengthens competition while protecting the buyer. Deaton’s standard clause offers $501 more than the highest bid, but not over a certain amount, such as $200,000 or $250,000.

Be careful when giving up inspection

The hot market has led many buyers to offer to waive inspections in order to signal their seriousness to sellers. If you have to forfeit the possibility of an inspection, make sure you don’t skip the inspection altogether.

To forego the possibility of a typical inspection without burning yourself out, be sure to reserve the right to perform an inspection for information gathering purposes. Also let the seller know that you won’t hold them responsible for any necessary repairs. This means, in a competitive market, giving up the possibility of a home inspection without giving up the inspection itself.

The idea is that you don’t want to ask the seller to pay for minor touch-ups, but you also don’t want to unwittingly buy a home that needs tens of thousands of dollars in repairs for structural flaws or mold infestation.

A house for sale in Los Angeles. (Dania Maxwell/Los Angeles Times/TNS)