Bank of America economists predict that house prices will remain high until at least 2026. Their report suggests that while the rapid price surges experienced during the pandemic will cool down, prices will not drop significantly.
This extended period of elevated prices poses a significant challenge, especially for first-time home buyers. Here are some strategies and considerations to help you navigate the housing market.
Leverage Financial Assistance Programs
Various institutions offer these programs and provide crucial support through grants, subsidies and favorable loan terms. Federal Housing Administration loans are a valuable resource. They require a down payment as low as 3.5% and have more flexible credit criteria, making them accessible to many buyers who might not qualify for conventional loans.
Similarly, the U.S. Department of Agriculture offers loans for rural home buyers, which often require no down payment and have lower interest rates.
For eligible veterans, the Department of Veterans Affairs offers VA loans, which come with competitive interest rates, no down payment and no private mortgage insurance. VA loans are an excellent option for those who have served in the military.
In addition to federal programs, many state and local governments offer initiatives to support first-time home buyers. These programs include down payment assistance, tax credits and low-interest loans.
MORE FROMFORBES ADVISOR
For example, the California Housing Finance Agency provides down payment and closing cost assistance through the MyHome Assistance Program. It offers a deferred-payment junior loan of up to 3% of the purchase price or appraised home value, whichever is less.
The MyHome program can be used in conjunction with various CalHFA mortgage programs, making homeownership more attainable for first-time home buyers. However, borrowers must meet CalHFA income limits and complete home buyer education counseling to qualify.
Other major locations like New York, Chicago and Texas have similar programs. Contact your local government to inquire about these assistance programs, which can significantly lower the price of your first home purchase.
Change The Target Location
Location flexibility can help you find more affordable options. Look beyond high-demand areas and consider neighborhoods or regions that offer lower prices but still meet your needs. This approach broadens your options and presents opportunities for future appreciation in property value.
Homes slightly farther from city centers tend to be more affordable. For example, if you are looking to buy in Los Angeles, the prices within the city limits can be prohibitively high.
However, considering neighboring areas such as Pasadena, Long Beach, or even the San Fernando Valley can provide more affordable alternatives while still being within commuting distance of the city. These areas often have lower property prices and, with ongoing development and improvements in infrastructure, can offer good value for money.
Conduct thorough research on up-and-coming neighborhoods, especially the long-term potential of developing areas. Target regions with planned infrastructure projects, such as new schools, parks, stadiums, and public transportation systems. These developments can increase property values over time, turning a more affordable purchase into a wise investment. In Los Angeles, the development of new Metro lines and improvements in public transit in areas like Inglewood and Boyle Heights have made these neighborhoods more attractive to buyers looking for future growth potential.
It’s also worth noting that some states have lower overall living costs and property taxes, making them attractive for home buyers looking to stretch their budgets. For example, Texas, Florida, and Tennessee have no state income tax, which can lead to significant savings over time. Cities within these states — such as San Antonio, Tampa and Nashville — offer various housing options at various price points, making them appealing destinations for buyers looking for affordability and a favorable tax environment.
Consider Fixer-Uppers
Fixer-uppers are homes that need renovation or repair work but can be purchased at a discount compared to move-in-ready properties. For instance, a house that needs a new roof, updated electrical systems, or modernized interiors might be priced 20% lower than similar homes in better condition.
Aside from the lower purchase price, buying a fixer-upper allows you to customize the home to your preferences. You can choose the layout, materials and finishes that suit your lifestyle, creating a personalized living environment.
If you’re willing to invest time and money into renovations, you can purchase a property at a lower price and increase its value through improvements.
Specialized loan programs, such as the FHA 203(k) loan and Fannie Mae’s HomeStyle Renovation loan, make financing the purchase and renovation of a fixer-upper more manageable. These loans combine the cost of the home and renovations into a single mortgage, providing a convenient financing solution.
Remember to conduct a thorough inspection before committing to a fixer-upper. For a price, a professional home inspector can identify structural issues, plumbing and electrical problems and other potential concerns. This helps you understand the full scope of needed repairs and avoid unexpected expenses.
Create a detailed budget for renovations that includes costs for materials, labor, permits and a contingency fund for unforeseen expenses. Make sure you work with experienced contractors who can complete the work efficiently and to a high standard. Seek recommendations, check references and read reviews before hiring to ensure you have a trustworthy team.
Lastly, consider the potential return on investment. Renovations like kitchen and bathroom remodels often provide a higher ROI. For example, updating a kitchen with modern appliances and new cabinetry can significantly increase the home’s value and appeal. Focus on high-ROI renovations to maximize your effort.
Co-Buy
This strategy allows buyers to pool their resources and afford a property that might be beyond their individual financial reach. By sharing the costs of the down payment, mortgage and maintenance expenses, co-buyers can purchase a larger or better-located property than they might on their own. This approach can be particularly beneficial in expensive urban markets or desirable neighborhoods where prices are prohibitive for single buyers.
In cities like Los Angeles or New York, where real estate prices are exceptionally high, co-buying can make homeownership more attainable. Two or more friends might decide to buy a multifamily property together, such as a duplex or a house with an accessory dwelling unit. This arrangement allows each party to have a separate living space while sharing the overall cost of the property. Similarly, siblings might purchase a single-family home and split the mortgage and other associated costs, making it more affordable for both parties.
It should be noted that co-buying requires careful planning and clear agreements to ensure all parties are protected and responsibilities are well-defined. You should decide beforehand how the mortgage payments will be divided, who will cover property taxes and insurance, and how expenses for major repairs will be handled. You should also agree on a plan for buying out one party’s share if those individuals decide to sell their interest in the property.
Get Preapproved
Preapproval clearly explains how much you can borrow and shows sellers you are a serious buyer, giving you a competitive edge. The process involves providing your lender with financial information — including income, assets, debts and credit history — which results in a preapproval letter that states the loan amount you qualify for.
Preapproval helps you identify and address any credit or financial issues before house hunting, saving time and preventing surprises. It also sets a realistic budget, allowing you to focus on homes within your price range. For example, knowing you are preapproved for a $300,000 loan means you can limit your search to properties within that range.
Sellers and real estate agents often prefer preapproved buyers, making your offers more compelling. In a competitive market, a preapproval letter can distinguish your bid and increase the likelihood of your offer being accepted. The process requires documentation like pay stubs, tax returns, and bank statements, with the lender performing a credit check. Typically, the preapproval letter is valid for 60 to 90 days.
Rent As A Temporary Solution
If all the other options are not feasible, renting can be a practical and strategic alternative. It allows you to save money, maintain flexibility, and avoid the financial strain of purchasing in a high-price market.
One primary advantage of renting is building your savings and improving your financial situation. By avoiding immediate costs such as a down payment, closing costs, and maintenance expenses, you can focus on accumulating funds for a future home purchase.
Additionally, maintaining a healthy credit score while renting will improve your chances of qualifying for a mortgage with favorable terms when you’re ready to buy.
While renting, consider investing your savings in low-risk investments like high-yield savings accounts or government bonds to grow your down payment fund. However, balance liquidity with returns to be ready for market opportunities.
Renting also allows you to explore different neighborhoods and find the best fit for your lifestyle without the long-term commitment of buying. This flexibility can be particularly advantageous if you are new to a city or unsure where you want to settle down.
Conclusion
The current housing market presents significant challenges for prospective home buyers, particularly first-timers. However, multiple strategies can help you navigate these obstacles and work toward homeownership.
By exploring financial assistance programs, considering different locations, evaluating fixer-uppers, exploring shared ownership, co-buying, getting preapproved, or continuing to rent, you can find a path that suits your situation and brings you closer to owning your dream home.
Each of these strategies provides a unique approach to mitigating the impact of high home prices and making the dream of homeownership more achievable in the current market.
