Millennials are in peak nesting mode. We want the outdoor space that many apartments lack or the growing space that a first home doesn’t. There is just one not so small problem.
The median sale price for existing homes in the United States was $389,500 in August, according to the National Association of Realtors. This is a 7.7% increase from August 2021. The average interest rate on 30-year fixed-rate mortgages topped 6% as of September 15 this year, according to Freddie Mac. Compare that with an average rate of 2.86% just a year ago — that’s a 110% increase.
It can be tough to compete when an open house feels like a cage match. That’s enough to set anyone back in a rental for a while. “We find that those who were considering buying a home just aren’t interested anymore,” says Natalie Slagle, certified financial planner and founding partner of Fyooz Financial Planning, based in Rochester, Minnesota. “People aren’t as willing to make big financial moves when they feel like there’s uncertainty.”
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Although you may feel stuck right now, you don’t have to be forever. Here’s what to do in the meantime.
Reassess your current situation
By slowing down your house search, you’ve bought yourself extra time. You can reassess what is realistic for you. Over the next year, your life could change a lot, which means your list of home essentials might need a few tweaks.
When Jason Fletcher was looking to buy his first home in Orange County, California in 2019, he was single. At the time, he couldn’t find The One, in terms of real estate, but it wasn’t long before he met his wife. They are currently expecting their second child and still hope to swap their tenancy for a home they own, one quite different from the one Fletcher was looking for three years ago.
However, their search is cut short. “I would say right now, at least in our area, we haven’t seen a lot of inventory increase,” he says. “That tells me that people are comfortable with the interest rates they have and they’re not selling.”
Amanda Astey moved to San Francisco with her husband seven years ago. They considered buying a house after living in the city for two years, but backed off after being unable to find anything in their price range at the time. Now they have advanced in their careers and are ready to resume research. “Even with that, we were pretty discouraged,” she says.
They are willing to live further from the city – and even leave the state in search of more space for the money. “We had a huge exodus of friends to Portland. A whole bunch of friends went to Denver,” she says. “It seems increasingly likely that another city would be our best option.”
Become an even more attractive buyer
If your budget and mortgage pre-approval were poor this time around, take the next few months to strengthen your finances so you’ll be in a stronger position later.
A starting point is discretionary spending. If you can reduce and possibly increase your income through promotion, employment, or self-employment, you can increase your savings and be prepared to make a larger down payment. You may also be able to increase your overall budget for a house. Fletcher and his wife have cut back on buying new clothes and are keeping their cars paid off longer to avoid car loans. “At this point, we’re trying to make more money and get promotions,” he says.
Paying off existing debt can also help, as it will reduce your debt-to-income ratio.
A higher credit score can help you qualify for better mortgage terms, hopefully ensuring you get as low an interest rate as possible. If you already have excellent credit, maintain it by paying your bills on time each month. Late payments can hurt your credit, and you’ve already worked hard to get where you are. If your credit score is lower, on-time payments can still help, as can limiting other loans or credit cards you apply for in the months leading up to your mortgage application.
Adjust your interest rate expectations
Sometimes your life plans don’t match economic conditions, so you may not be able to wait forever for interest rates to come down (assuming they will, which is never guaranteed). In this case, you will have to bear higher monthly payments, and if interest rates drop in the future, you can refinance. You may have to make some concessions to accept a more expensive loan, such as reducing your overall budget or widening your search to a wider area.
Phil Lawson, a real estate agent in Richmond, Va., notes that even now interest rates are historically low. When he bought his first home 20 years ago, he paid 7.6%.
“It’s a stupid cliche, and I’ve said it over the years,” he says. “Marry the house but date the rate.”
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