What buyers can do in this housing market
Millennials are in peak nesting mode. We want the outdoor space many apartments lack, or the room to grow that a starter house doesn’t offer. But there’s a not-so-small problem.
The median existing house sales price of U.S. houses was $389,500 in August, according to the National Association of Realtors. That’s a 7.7% increase from August 2021. The average interest rate for 30-year fixedrate mortgages topped 6% as of Sept. 15 this year, according to Freddie Mac. Compare that with an average rate of 2.86% just one year before — that’s a 110% increase.
It can be hard to compete when an open house feels like a cage match.
It’s enough to make anyone retreat to a rental for a while. “We’re seeing that those who were thinking of buying a house just aren’t interested anymore,” says Natalie Slagle, a certified financial planner and founding partner of Rochester, Minn.-based Fyooz Financial Planning. “People aren’t as willing to make big financial moves when it feels like there’s uncertainty.”
Though you may feel stuck right now, you don’t have to be forever. Here’s what to do in the meantime.
RE-EVALUATE NEEDS
In slowing down your house hunt, you’ve given yourself the gift of extra time. You can reassess what’s realistic. Over the next year or so, your life could change a lot, meaning your list of must-haves for a house might need a few changes.
When Jason Fletcher was looking to buy his first house in Orange County, Calif., in 2019, he was single. At the time, he didn’t find The One, real estatewise, but it wasn’t long before he met his wife. They’re expecting their second child and still hoping to swap their rental for a house they own, one quite different from what Fletcher wanted three years ago
However, their search is coming up short. “I’d say right now, at least in our area, we have not seen inventory increase a whole lot,” he says. “That indicates to me that people are comfortable with the interest rates they have and they aren’t selling.”
Amanda Astey moved to San Francisco with her husband seven years ago. They considered buying a house after living in the city for two years, but backed out after they were unable to find anything in their price range at the time. Now, they’ve advanced in their careers and are open to resuming the search. “Even with that, we’ve been pretty discouraged,” she says.
They’re open to living farther from the city — and even to leaving the state in search of more space for the money. “It’s seeming more and more likely that another city would be our best option,” she says.
BECOME MORE ATTRACTIVE
If your budget and mortgage preapproval were so-so this time around, take the next few months to beef up your finances so you’re in a stronger position later on.
One place to start is discretionary spending. If you can cut back, and possibly increase your income with a promotion, job or freelance work, you can add to your savings and be prepared to make a larger down payment. You may also be able to increase your overall budget for a house. Fletcher and his wife cut back on buying new clothes and are keeping their paid-off cars longer to avoid car loans.
Paying down existing debts can help, too, as that will lower your debt-to-income ratio.
A higher credit score can help you qualify for better mortgage terms, hopefully ensuring you can get as low an interest rate as possible.
If you already have excellent credit, keep it there by paying your bills on time every month. Late payments can ding your credit, and you’ve already worked hard to get where you are.
If your credit score is lower, on-time payments can still help you, as can limiting what other loans or credit cards you apply for in the months before you apply for a mortgage.
ADJUST YOUR EXPECTATIONS
Sometimes your life plans don’t line up with economic conditions, so you may not be able to wait indefinitely for interest rates to go down (assuming they will, which is never guaranteed). In that case, you’ll have to stomach higher monthly payments, and if interest rates go lower in the future, you can refinance. You may have to make some concessions to accommodate a more expensive loan, like reducing your overall budget or widening your search over a larger area.
Phil Lawson, a real estate agent in Richmond, Va., notes that even now, interest rates are low, historically. When he bought his first house 20 years ago, he paid 7.6%.
“This is a stupid cliche, and I’ve said it over the years,” he says. “Marry the house but date the rate.”