Over the past few months, a lot of younger people from the millennial generation have been dipping their toes in home buying market. Although there are more and more actual buyers out there, a certain percentage millennials are continuing to sit on the fence.
Most of the time, this is due to an understandable disappointment in what their money can buy in a strong seller’s market. A hefty percentage back off because they want more house (or more condo) than they can buy. So, they resolve to keep renting while they build up their savings for the bigger downpayment they will need.
The difficulty about doing this in a seller’s market is that it may not work so well. The problem with this is that the goal posts are going to keep moving. What you can purchase today for $500,000 will cost more tomorrow. As your money buys less, it will take a bigger downpayment to purchase the same thing, let alone something bigger. Interest rates also appear to be slowly rising, increasing your monthly payment which may also make it harder to qualify for a loan.
In this type of market, the of strategy can be self-defeating. Purchasing a “starter” home is more likely to help a younger person build the equity they need to get to that larger home. It’s good to remember that the only equity anyone builds while renting is for the benefit of their landlord.
The question each new home buyer has to ask is this: Are you pricing yourself out of a market because you aren’t getting everything you want for the price you can afford?
Allow me to let you in a little secret: EVERYONE wants at least 20% more than they can afford. Even people purchasing $5 million homes wish they could just have a little bit more…That’s human nature.
The GenX and Boomer generations understood that their first home was probably going to be less than everything they wanted. They dealt with the smaller space, the older kitchens and baths because they knew that the longer they waited to purchase, the longer it would be before they would start gaining that precious thing called equity.
This is from the White Plains market. If you had waited in 2015 to save more money for a downpayment on a bigger White Plains home for 2016, you would have been in for a nasty surprise.
The median price for a home had increased $45,000. So that house that sold for $615k, in 2015 was probably going to cost you $660k in 2016. That equity could have been yours. Instead, it went to your landlord.
Worse still, if you were planning to put 20% down on the home in order to avoid PMI, that meant you would have to come up with an additional $9000 to purchase the same house.
Let’s say you are a first time buyer. Your ideal is a nice spacious 2 BR modern condo with all the trimmings. But in lower Westchester, that is going to run you over $500k, which you simply can’t afford.
So what to do?
That depends on what is most important to you. If you want space, then maybe an older condo or a cooperative with good financials is a solution. A 2 BR higher-end cooperative is about the same price as a small 1BR condo. You may have to wait for parking, use a common laundry and forego some other amenities that modern buildings have, but you would have the space you crave. If amenities are important, maybe you don’t need as much space as you think you do.
For a house, it could mean settling for a smaller house. Perhaps one less bedroom or bath. A home with a more dated kitchen is often less expensive as well. It will mean a compromise between space, location and condition.
Last year I had quite a few home buyers say “no” to price points that are now gone. I told these buyers that things were only going to get “harder” if they chose to wait. This wasn’t some hard-core sales tactic on my part. It was simply the reality of the market. The conditions this year are largely the same. Rents are higher, pushing people to buy. Inventory is tight and no one is building entry level housing, so there are no levers to loosen supply and ease prices going forward.
One other thing to remember – increasing home values is only bad news when you decide to continue renting. Once you are a homeowner, it’s all good.
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