Not Buying a Home Could Cost You $65,000 a Year
Not buying a home right now will cost you, because home prices and interest rates are going to rise. Many renters would like to own, but they can't afford down payments or don't qualify for mortgages. Those two conclusions, drawn from separate reports released this week, sum up the housing market dilemma for many young professionals: Buyers get more for their money than renters-but most renters can't afford to enter the home buying market.
The chart below comes from data published today by realtor.com that estimates the financial benefits of buying a home based on projected increases in mortgage rates and home prices in local housing markets. Specifically, it shows the amount that buyers gain, over a 30-year period, over renters in the country's largest metropolitan areas.
The penalties for waiting to buy tend to be greater in smaller metro areas, especially in California. For example, the estimated cost of waiting one year was $61,805 in San Jose and $65,780 in Santa Cruz. Over the course of 30 years, homeowners save more than $1 million in Santa Cruz, the largest amount of any U.S. city.
To compile those numbers, realtor.com compared median home prices and the cost of renting a three-bedroom home in 382 local markets, then factored in estimates for transaction costs, price appreciation, future mortgage rates, and interest earned on any money renters saved when it was cheaper to rent.
In other words, researchers went to a lot of trouble to quantify something that renters intuitively know: They would probably be better off if they could come up with the money to buy. Eighty-one percent of renters said they would prefer to own but can't afford it, according to a new report on Americans' economic well-being published by the Federal Reserve.
Not all markets favor buyers over renters. In Dallas, the benefit of buying was about $800 over 30 years, according to Realtor.com's model, which expects price appreciation to regress to historical norms. In many popular markets, though, there are greater benefits to owning
"It shouldn't be a surprise that the places where you can have the highest reward over time also have the highest prices," said Jonathan Smoke, chief economist for realtor.com. "It's not true that if you're a median-income household, that you can't find a home that's affordable, but in places like San Jose and Santa Cruz, less than 10 percent of inventory would be affordable."
Or as Logan Mohtashami, a senior loan officer at AMC Lending Group in Irvine, Calif., told Bloomberg Radio this week: "The rich have no problem buying homes."
Are You in a Buyer's or Seller's Housing Market?
Housing supply is tight in most cities across the United States, but that does not mean that every market is a seller's market.
Today's homebuyers are a finicky lot and a mortgage-dependent lot and a confidence-lacking lot; they may want to buy a house, but they're not as willing to be as "house poor" as they might have been in the past. That is why it is more important than ever today, as both a buyer and a seller, to know your market well and know its housing value even better.
Less than a third of U.S. housing markets are seeing homes sell for above asking price, 60 percent are still seeing homes sell for below and about 14 percent are seeing homes go at market value, according to RealtyTrac, a real estate sales and analytics company. At the same time, a larger-than-normal percentage of sales are being done all in cash, which increases competition even in markets where home prices are not soaring ever higher.
As always in real estate, sellers need to know what the market will pay, and buyers need to make smart bids. In today's market, those truths are more acute than ever, as an increasing number of buyers compete for a dwindling number of listings. Even in a tight market, some homes will sit if not priced correctly.
So where are sellers in the driver's seat? No surprise, the Bay Area of California, where homes are selling for 108 percent of asking price on average, according to RealtyTrac. Sellers are also getting more than asking in Washington, D.C., Winston-Salem, North Carolina, and Cass County, North Dakota.
Buyers are more in control in St. Louis, Baltimore, Pittsburgh, Atlanta and Burlington, Vermont. Sellers are getting around 80 percent of asking price in these markets, even though supplies of listings are still limited.
Where are the stakes even between buyer and seller? Raleigh, North Carolina, the D.C. suburbs in Montgomery County, Maryland, Riverside County, California and the Phoenix metropolitan area.
Home price gains have been accelerating nationally for the past several months, thanks to tight supply and still-low mortgage rates; builders are still operating below a normal pace, and a lot of potential sellers are still reluctant to list, as they fear they will find nothing they like or can afford to buy.
Should mortgage rates move higher, as some expect, the dynamics in all of these markets could shift dramatically. For now, though, it is good to know as much as possible about your market's value, and even better to know when to walk away.
Pending Homes Sales Up 3.4% in April, Highest in 9 Years
U.S. home buyers signed more contracts to buy existing properties in April. A monthly index of so-called "pending" home sales from the National Association of Realtors rose 3.4 percent from March to the highest level in nine years. Pending sales are now up 14 percent from a year ago.
"Realtors are saying foot traffic remains elevated this spring, despite limited-and in some cases severe-inventory shortages in many metro areas," said Lawrence Yun, chief economist for the Realtors.
Regionally, April pending home sales in the Northeast finally bounced back, up 10.1 percent from March. In the Midwest, sales increased 5 percent, in the South increased 2.3 percent and in the West moved just 0.1 percent higher.
While interest rates moved sharply higher at the beginning of May, they didn't move much at all in April, when these buyers were out shopping. The average contract interest rate on the popular 30-year fixed mortgage hovered right around 3.65 percent, relatively low. Rates are now sitting closer to 4 percent.
Closed sales of existing homes fell unexpectedly; Realtors blamed tight supply of listings and rising home prices. The median price of an existing home sold in April was $219,400, an 8.9 percent increase from one year ago.
"Homeowners looking to sell this spring appear to be in the drivers seat, as there are more buyers competing for a limited number of homes available for sale," added Yun. "As a result, home prices are up and accelerating in many markets."
8 Steps to Take Before Buying Your First Home
A home will likely be the biggest purchase a person ever makes - along with being the most daunting purchase.
But the good news is most of the problems homebuyers face have a quick solution, if completed before trying to get a mortgage.
In a recent interview, Katie Miller, vice president of mortgage lending with Navy Federal Credit Union, encouraged potential homebuyers to have the conversation with a loan officer about what they can work out.
To help overcome the imitating home buying process, the Independent Community Bankers of America offered the following eight suggestions for perspective first-time homebuyers.
Follow this and the entire home buying process will go much smoother:
- Discuss your finances with your bank before you begin looking for a home. It is important to stay within your means when purchasing a house.
- Gather and organize paperwork and documents. Items you should have readily available include paycheck stubs, W2 forms, tax returns and bank and investment statements for the last two years.
- Know your monthly income and budget, including how much you spend on rent, utilities, entertainment, clothing, food and transportation.
- Check your credit report so you are aware of what your current credit score is before applying for a loan. Credit reporting agencies must give you one free report annually.
- Maxing out credit cards or falling behind on other loan payments could create issues when applying for a mortgage. Keep tabs on your spending habits before applying for a mortgage. Once you apply for a mortgage, don't take on more big debt until it closes.
- Work with your banker to figure out how much you can borrow and which mortgage product is right for you. "Your local community banker can explain available mortgage options- including rate adjustments, fees and other loan features - so you are prepared for the loan closing and not surprised down the road," the ICBA states.
- Learn what current mortgage rates are. Bankers are there to help you understand how that translates into monthly mortgage payments.
- Check with your state, city and county government agencies for special first-time-homebuyer loan or grant programs available to assist with down payment and closing costs.
5 Upgrades That Sell Your Home
Start with the most basic requirements
It might not seem glamorous, but it's necessary: Fix the things that need to be done. If your pipes are leaking, no one is going to care what the kitchen looks like. If the furnace doesn't work, buyers might not bother looking at the awesome master suite. Replacing things like the roof or siding have consistently shown up at or near the top of the list for projects that allow homeowners to recoup a majority of their investment upon a home sale, according to Remodeling Magazine's Cost vs. Value report.
Begin with a list of upgrades that would matter most to you if you were the one buying a new house. Could you handle those old, drafty windows? Would you be willing to live with a damp basement? Would you agree to move into a house that had a serious roof issue? If the answer is no, replace those things first.
Update the kitchen
Once necessary repairs are completed, turn to the kitchen. The kitchen is the heart of the home, and it is also what sells the home to many buyers. A great kitchen layout, complete with modern, energy-efficient appliances and lots of good lighting, can make anyone pause for a second look. Now is the time to turn to upgrades like re-facing those old cabinets (assuming the cabinet boxes are sound), investing in new countertops, and springing for a shiny faucet -- a hands-free one if you really want to impress.
You can do these things without much of a financial hit, but if you really want to sink some cash into the kitchen upgrades, look to a minor kitchen remodel. Remodeling Magazine reports that for a national average cost of just over $19,000, you could have a complete cabinet re-facing, new countertops and flooring, a mid-priced sink and faucet, and all new paint and trim. This might lead to a return on investment of about 79% -- not a big money-maker, but perhaps enough to sell your home to impressed buyers.
Refresh the bathroom
The bathroom should be an oasis. If yours is something much less, consider improving it with new lighting, fresh caulking around the tub and shower, and bright new faucets that draw the eye. If things are really rough in there, consider replacing the vanity with something more modern (including a nice new granite or marble countertop), laying new tile, and painting or wallpapering the walls with something fresh and attractive.
A minor bathroom remodel doesn't cost as much as the aforementioned kitchen remodel, according to Remodeling Magazine, but it also doesn't return as much on your investment. A bathroom remodel could set you back a national average of almost $17,000, and includes replacing the tub and shower, installing all new faucets, a new vanity and standard toilet, fresh wallpaper, and ceramic tile flooring. The recoup is about 70%.
Dig into the landscaping
Curb appeal matters, so make it count. Take good care of your trees and shrubs, keep the lawn looking nice, and sweep the driveway on a regular basis. If serious upgrades are called for, consider adding new flower beds, resealing the driveway, lighting up the walkways and adding a deck or patio. An easy way to enhance curb appeal is with a new door, made of steel or solid wood core, in a color that makes the house "pop."
When it comes to making money on your investment, landscaping can carry a big bang for your buck. For instance, a new steel entry door can cost about $1,200 but can return over 101% on investment, while a new deck can cost about $10,000 and return 80% on investment. Even a garage door replacement, at about $1,500, can bring back over 88% of what you put into it, according to Remodeling Magazine.
One final investment: a home stager
No matter how carefully you invest in home improvements, you might need some help in showing it off. A home staging expert can carefully arrange the furniture, art and other d?cor to create a look that will draw in potential buyers. These experts can also give you a firm idea of what you need to work on inside the home, such as re-glazing that old tub or adding more lighting to a particular room.
Keep in mind that home staging is not a field that requires any particular credentials, so in-depth research into the home stager's work history and experience is a must. Insist on seeing a portfolio of previous work. Expect to pay $200-$500 for an in-home consultation -- the cost depends upon the size of your home, according to Cost Helper. If you choose to use a home stager throughout the time your home is on the market, you might spend up to $8,000 or more, depending upon where you live.
When selling your home, having an edge over the competition can mean the difference between a quick sale and a long languish on the market. By choosing the upgrades that suit your budget and your home's needs, you can enhance your chances of closing the deal.