It's gotten harder to buy a home. Here are some options to look at if you're struggling to find something within your price range.
It's no secret that home prices have risen over the past year. We can thank competitive mortgage rates, low inventory, and high demand for that.
But the latest National Association of Home Builders and Wells Fargo Housing Opportunity Index confirms that home affordability weakened during the first quarter of 2021. An estimated 63.1% of newly built and existing homes that sold between the start of January and the end of March were affordable to families earning the median U.S. income of $79,900. But that's down from the 63.3% of homes sold in 2020's fourth quarter that were considered affordable for buyers with the same median income.
Why are homes less affordable?
Low housing supply has caused home prices to rise over the past quarter -- namely because a lot of homes for sale ended up in bidding wars. That's where competing buyers attempt to duke it out over the same property, which drives up its sale price in the process. Mortgage rates also rose during the first quarter of 2021, which contributed modestly to a downtick in affordability.
It's worth noting that mortgage rates held steady at competitive levels last quarter on a historical basis -- they just didn't reach the record lows we saw during the second half of 2020.
Furthermore, a lumber shortage has caused the cost of new construction to soar about $36,000 more on average. Newly built homes are generally more expensive than existing ones, but now, that gap may be widening.
Coping with limited affordability
Clearly, it's more difficult than usual to find an affordable home. So what can you do if you're looking to buy in this challenging market?
For one thing, sit tight and consider waiting until housing inventory opens up. A big reason homes are selling so high is that there just aren't enough out there for people to buy. But as things improve on the pandemic front, we could see inventory pick up later in the year. Meanwhile, though mortgage rates have the potential to climb, they're unlikely to rise substantially in the course of the next few quarters. So waiting until summer or fall to buy could be a smart bet.
At the same time, making yourself the most appealing mortgage candidate possible will increase your chances of snagging a low rate on your loan. And that alone could make any home you buy more affordable. In this regard, it pays to:
- Boost your credit score if it's not already high. You may want to aim for a score in the mid-700s or higher.
- Pay off some existing debt to lower your debt-to-income ratio.
- Save more funds for a down payment.
Right now, it's a tough time to buy a home for people across all income levels. If you're an average earner, your options may be even more limited. But don't despair -- today's housing market is uniquely crowded with buyers, not to mention lacking in homes for sale. That could change in the course of the year, so hang in there and work on making sure you're an attractive mortgage candidate. That way, you can pounce once inventory does open up.
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