If home ownership is one of your new year goals, you may wonder how to separate homebuying fact from fiction. Although Millennials may have uncertainty, homeownership remains a top priority. This recent article by First Republic Bank seeks to clear up the misconceptions and provide a compelling look at why now may be the best time buy a new home.
Myth #1: Buying is unaffordable
A house is a big financial commitment. There’s a down payment, mortgage payments, and less obvious costs: insurance, upkeep, realtor and HOA fees.
These costs are currently exacerbated by a shortage of starter houses in major metropolitan areas, where employment for young people is increasingly concentrated. In 2016, starter houses comprised only 22% of new single-family homes, compared with 33% on average from 1999 to 2007, according to Harvard University’s Joint Center for Housing Studies.
And yet, even as urbanization foreseeably continues, home buying isn’t out of reach for young people. Even in cities like New York, DC, and Boston, median housing expenses (mortgage and other costs) account for less than 30% of median incomes. Today’s interest rates are historically low: about 4.7%, versus 8% in 2000 and over 16% in 1981-82, when affordability was unprecedentedly bad.
Let’s break out real figures: For a house valued at $750,000, with a down payment of 20% and a 30-year fixed-rate mortgage at a 4.7% rate, you’ll pay about $3,400 monthly. The Federal Reserve Bank has signaled rates will rise again, though they will remain attractive. Same scenario, but with a 5.7% rate and you’ll pay about $3,780 monthly—still below rent for equivalent properties in most major cities.
The bigger affordability challenge is upfront costs—particularly down payments. Contrary to stereotypes, millennials mostly bootstrap their own down payments, with 58% having saved and 24% getting money from the sale of a previous home. Only 21% got a down payment as a gift from family or friends. Saving for a down payment isn’t easy, but it’s far from impossible with sound financial planning and smart concessions on location and home size. In fact, millennials show all signs of following previous generations’ home buying path, just a little bit delayed.
Myth #2: House prices are volatile
Millennials came of age in a rare moment of history. The housing market bubble grew and burst. In December 2008, the Case-Shiller Home Price Index reported its largest price drop in its history. The crash was a reality check for lenders, and a deterrent for young people who lost faith in home investment. But in just a few short years, home values have largely climbed back up. Even during volatile aberrations, home values remain smart long-term investments.
A house is a special asset—it can’t move, you can’t break it up to sell a small piece, and its value depends not only on how well you take care of it but also on the prosperity of the greater community. Such characteristics can influence prices, especially when a seller is in a hurry. Usually, though, sellers are loath to lower the price, even in the face of weak demand. This makes prices “sticky” because sellers would rather stay put—if they have the choice—and wait for prices to bounce back.