It's exceptionally rough for house hunters right now. Housing prices, compared to incomes, are around an all-time high. In addition, mortgage rates are near decades-high levels.
High prices plus high costs of borrowing make it much harder for people to afford their first homes. It also makes it less likely that people who have locked in low interest rates on their existing mortgages will be willing to move and take on substantially higher rates to buy their next homes.
All that adds up to what looks like the toughest housing market in a long time for those who either need or want to move. In a world like that, it's important to recognize that you can't control housing prices -- but you can control what you do about them. Here are three things you can do to deal with the craziness of today's housing prices.
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No. 1: Reconsider renting
According to research done by Redfin, in nearly all major metropolitan areas in the United States, it's currently cheaper to rent than to buy. Sure, you're not building any home equity, but you're also not responsible for maintenance, repairs, or taxes on the property. In addition, especially early in a 30-year mortgage, nearly all the payment goes toward interest and not paying down the principal, anyway.
All this considers just the monthly costs of owning vs. renting. When you also include the costs associated with buying and selling a house -- commissions, mortgage fees, inspections, transfer taxes, touch-up repairs -- homebuying gets more expensive.
If you also incorporate the opportunity costs -- the alternative uses of the money that you would put into buying a home -- then investing that money instead can be a decent option. Even if you would ultimately still want to be a homeowner, having your money invested instead of tied up in real estate can potentially help you grow an even larger nest egg.
No. 2: Save up for the down payment on the home you want
If there's an upside to higher interest rates, it's that money socked away into good, old-fashioned savings accounts can earn decent interest rates these days. According to Bankrate, some savings accounts are even topping 5% interest at the moment. When looked at compared to the recently published inflation rate of 3.2%, the money you're socking away in the bank might be retaining its purchasing power at the moment.
That's an important milestone if you're looking to buy a house. When rates were near zero, it was more difficult to justify saving money in an ordinary savings account for the purpose of buying a home. Now that the money you're saving can actually hold its ground, it makes much more sense to have that pot of safe and liquid cash available to you -- particularly if you want to buy your house in the near future.
No. 3: Be more flexible on timing and invest for your home
Of course, with the median average home price around $416,000, a 20% down payment would require a bit over $83,000. That's a lot of money to save and likely will take several years.
Over the long term, the U.S. stock market has provided average annual returns of around 10%, but they come with very real risks. In particular, there are no guarantees that you will earn those returns, and money invested in the stock market can, in fact, lose value.
That being said, if your goal is to own a house someday, but you're not bound to a specific timeline, that flexibility can give you the opportunity to invest to save up for your home. By investing, you can attempt to earn those faster rates of return that the market has historically offered. By being flexible with your timing, you can better deal with the fact that if the market doesn't cooperate, it may take you longer to come up with your down payment by investing vs. saving for it.
Hang in there
Because of out-of-control housing prices, buying a home may seem out of reach at the moment. Chances are good, however, that with patience and persistence, you can get to a spot where you can. With decent financial planning along the way, you can build up a sufficient nest egg to make that down payment -- or decide when you get there that you'd rather have the money than the house.
After all, there's nothing wrong with renting. Still, if you ultimately choose to buy a house, doing so with enough of a nest egg to cover those additional costs of ownership will give you a better shot at making it ultimately worth your while.
Whichever path you take, make today the day you start taking action on the financial aspects of homebuying that are in your control. By doing so, you'll give yourself a better chance to comfortably buy a home that much sooner.
