3 Ways to Afford Your First Home
Many prospective home buyers are worried about how to afford their first home. Apparently over 30% of Americans mostly considered housing affordability when they cast their vote in this last Presidential election. I see memes and read comments constantly from folks assuming that they will never be able to afford to buy a home. Are they right?
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By some measures homes in Watkinsville have appreciated over 70% in the last five years.* When I look at my own home buying experience I know that homes have continued to go up in price with the exception of a dip during the recession. My first house was less than $80,000! Our second home, bought in 2001, was $155,000 (and was sold in 2012 for $135,000 after refinishing the basement which felt devastating at the time). When run-down mobile homes way out in the country typically cost more than $200,000, I can understand why so many people think they will never be able to buy a home.
Economic Factors
Lots of economic factors influence the price of homes. The simplest to understand is basic supply and demand. We have way more people than housing units. After the recession, new home builds stagnated. Boomers are staying in their homes longer. Millennials and Gen Z’s are needing a place to live. Ridiculously low interest rates around the pandemic also encouraged more investors and second home buying. Typically when something is scarce, it costs more and we are seeing that with homes. Throw in the current cost of building materials (hello inflation) and labor costs, new builds are at an all time high. Although there might certainly be another dip in the market at some point, unless there is a global economic disaster, I don’t see home prices going down over time. This is not a bubble.
If you are fortunate enough to already own a home, then you can use the equity in your current home when you sell it to buy the more expensive next house. See my recent video, Home Equity 101 on why you shouldn’t spend the equity in your home on anything other than your current or future home. But what if you don’t have that? With the median home price in Georgia being over $370,000 and in our area most homes being well over $400,000, what do you need to do to be able to buy a home? Talking to a good lender who can walk you through your debt-to-income ratio, credit score and need for a down payment would be step one (read Can I Get a Loan? Where Do I Start?). Assuming you have decent credit, a 3% down payment ($12,000), 7% interest rate and are buying a $400,000 home with the seller paying all the realtor and closing costs, you are looking at a monthly payment of about $3,435 (taxes and insurance will vary a bit affecting this number). Assuming you have no other debt - no student loans, car payments, credit card balance - you would need to gross at least $100,000 a year in order to qualify to buy this home. Very few people in their 20’s and even their 30’s are making that. If you have a partner and both of you work, then it may be a possibility.
So, where is there hope? How can anyone buy that first home?
Think outside the box - don’t buy the median priced home. It is possible to buy a decent home in a decent area for well below the median home price. This year alone I helped two first time home buyers find nice homes in central Athens locations in the low 300’s. As I outlined in The Crazy Cost of Rent Part 2 and The House Ethan Chose & Why you can buy that ugly home and make it pretty. I LOVE HELPING PEOPLE THINK OUTSIDE THE BOX. If you are willing to live a little bit further out in the country or do cosmetic renovations, you can find a great first home for much less. If you have the option for a flexible lease so you can jump on the right home when it hits the market, do so.
Have a bigger down payment. For years the conventional wisdom was to have at least a 20% down payment. When interest rates were low that was much less of a consideration than it is now. In the above scenario with 20% down, not only would you save the $320 private mortgage insurance payment but you wouldn’t be paying 7% amortized interest on $68,000 ($452 a month). Your monthly payment on that same home would be $2663 meaning to qualify your income would only need to be $75,000. For the first time in my career, rents in our area are actually cheaper than mortgages on the same type of home. You may need to rent for a while and start saving aggressively for that down payment.
Find a home that has some income potential. Even if a lender will let you borrow up to your maximum amount, you may not want to have to pay that much each month. One way to get more house for your money and start building that equity, is to have a home that you can get some rental income from. You could buy a duplex and live on one side while renting the other side. I have had several clients buy a home with a basement and then Airbnb that space. You could build or buy a home with an ADU (accessory dwelling unit) to rent either short or long term. If you have family near by or like to travel, you could do short term rentals on weekends, especially football weekends in Athens. As someone who has done these things myself, I love helping you find the spaces that could work for your family.
You can buy that first home despite what you might be seeing on social media or reading on the news. I would love to help you find it!
*When researching this, I found lots of different metrics and data sources. Some were analyzing all home appreciation and some were only looking at homes that had actually been bought and sold during that time period. Regardless, homes have gone up significantly in the last five years.