It’s tough out there for would-be homeowners.
They’re facing rising mortgage rates, higher home prices and a shortage of available houses in many markets. Plus, recent changes to the tax law do them no favors.
So what can a potential homebuyer do?
Higher mortgage rates may feel like salt in the wound for those shopping in tight markets.
Rates have been rising since late last year. The average rate on a 30-year, fixed-rate mortgage hit a high of 4.45 percent last month. That’s its highest since 2014, but still well below where it’s been historically.
“The fours are not a terrible place to be,” said Skylar Olsen, director of economic research at Zillow.
So what does this cost the homebuyer?
If the median home price in the US is $225,264, then over the life of a 30-year loan at 4.5 percent you’d pay $148,506 in interest. At 5 percent, it rises to $168,057 in interest. That’s a difference of $19,551.
But for perspective, consider the $229,849 someone would pay over the life of the loan if the rate was 6.5 percent, where it was hovering the summer of 2007 before the recession hit. That’s more than $81,000 over the first example.
These all assume a 20 percent down payment.
What can you do to cope?
Your credit will largely determine the rate you get, so keep that clean. Lock in your rate when you are ready. Rates vary day to day and timing it well is more luck than skill, Olsen said.
It’s not a market for the faint of heart.
The median home price right now is up 7.6 percent from last year and up 15 percent compared to the year before that, according to Zillow. And compared to three years ago? Up nearly 22 percent.
These price hikes, more than higher rates, make the costs prohibitive for some buyers.
And inventory is tight because homes are selling so quickly.
“If you are struggling with the fact there aren’t a lot of options, you have to be looking every day,” she said. And move fast if you do find something you like.
It’s even more important in a challenging real estate market to make sure you have the basics covered: check your credit, know what you can afford and come to the hunt preapproved for a mortgage.
Homes in many markets are receiving multiple offers, so be ready to compete. Consider ways to sweeten your deal: a bigger down payment, more earnest money or a shorter closing time may give you an edge.
You also may also want to consider an escalation clause, which allows a buyer to say they will pay a certain amount over any higher offer up to a ceiling.
And cash is still king. An all-cash offer means there are no appraisals or mortgages to slow (or possibly derail) the deal.
If you can, consider asking for help. Olsen said that in pre-recession days, about 18 percent of buyers accepted a gift from family or friends. Now it’s about a quarter.
HELP ALONG THE WAY
If you’re a novice, consider attending a first-time homebuyer class or meeting with a HUD housing counselor, who can provide free or low-cost advice. They can walk you through the process and help you assess what you can afford.
They can also alert potential homebuyers to assistance programs in their area, said Karen Hoskins of nonprofit NeighborWorks America. There are a variety of programs that help people with down payments, closing costs or other services.
Finally, a good real estate agent can help buyers craft a deal and assist with their knowledge of the market. For example, Olsen notes that on the West Coast it’s more common to price a home low with the assumption offers will come in over asking, whereas on the East Coast it’s more acceptable to make an offer below asking.
THE TAX MAN
What about taxes? It’s true, tax laws are not as generous as they once were for homeowners, but the changes don’t affect everyone equally.
Homeowners can deduct interest paid on the first $750,000 of a loan for a newly purchased first or second home. That is down from the prior limit of $1 million.
And homeowners have also lost the unlimited federal deduction for state and local income and sales tax. Taxpayers will now be allowed to deduct only up to $10,000 in combined property and state and local income taxes, so that hurts people in areas with heavy tax burdens.
Homeownership isn’t for everyone but if you decide to stay in the hunt, keep saving as it’s an appreciating market in many areas.
And try not to get lost in the mania. The usual rules still apply: don’t buy more house than you can afford and think about the practicality of it as a place to live, not an investment.
“We have already seen the hard lessons people have learned when they assume everything is moving up and there will be no pitfalls or crashes,” said Bruce McClary of the National Foundation for Credit Counseling.
“There is an investment value in homeownership but time is a big factor. It’s slow and steady because there are peaks and valleys. It can be a roller coaster at times.”