The first question your clients should ask themselves when they begin the home buying process is, "What can I afford?" After all, when we talk about economic conditions and housing market trends, it all comes down to affordability. Affordability is the amount that a purchaser is able to pay for something – in this case, a home.
Affordability is equally important to all buyers even though it varies between individuals and geographic locations. One of the best services you can provide your clients is to help them close the gap between what they want and what actually makes sense for their budget. When you first sit down with buyers, have them identify their "wants" and "needs" in a home. This way, if they are faced with an affordability issue, they can eliminate some of their "wants" and maintain their "needs," ensuring they still find a home they love. Then, recommend they get prequalified by a lender as soon as they can to be sure that the bank agrees with them on what size mortgage they can afford.
How Affordability Is Determined
The national index for housing affordability is published quarterly by the National Association of REALTORS® . Affordability is determined by evaluating median prices for homes sold against median income levels as well as looking at current mortgage rates. This yields a baseline which varies depending on income level and geographic location. Historically, the average family spends 21.6% of their income on housing. In 2014, Americans were at 15%, which is historically low and will rise as affordability decreases.
Median home prices for 2014 rose to their highest level since 2007. The year closed out with a median existing-home price of $209,500 in December 2014, which is 6.0 percent above what it was at the same time last year marking the 34th consecutive month of year-over-year price gains.
The aha: How to Serve First-Time Home Buyers Between the Ages of 25-35
After years of remaining relatively inactive in the housing market, first-time home buyers between the ages of 25 and 35 are expected to make more of an appearance in 2015 than in previous years. With unemployment rates down and wages expected rise, young first-time home buyers are finding themselves in a much friendlier home buying climate. Additionally, lending standards relaxed in 2015 making it a little easier for them to get a loan.
The average family spent 15% of their income on housing in 2014. First-time home buyers spend 10 percent more as a percentage of their income on housing. This means they are spending 25 percent of their income on their housing. Signs point to an increase in mortgage rates and home prices in 2015 which will ultimately impact affordability bringing it closer to historical averages resulting in first-time home buyers moving into a 31-32 percent bracket. Therefore, if first-time home buyers can afford it, now would be a great time to buy their first home and get in while rates are historically low and affordability is historically high.
If you have clients who are first-time home buyers, here are a few things to consider and discuss with them:
Many lenders require 3-5% down for first-time home buyers. One thing your clients need to understand about this is that by not putting down 20% or more, they will likely have to pay monthly mortgage insurance (PMI) until their loan to home value ratio is 20/80 or higher. Home buyers have to be sure to speak to their lender about the possibility of PMI payments and what that would do to their monthly payments.
Most first-time home buyers between the ages of 25 and 35 have unprecedented student loan debt with monthly payment amounts that could affect their debt to income ratio. Even graduates who have loans in deferment or in a grace period are subject to having their expected payment amounts factored into their debt. Due to this, it is even more critical that this group of home buyers seek prequalification as early in the home buying process as possible.
Another unique factor about this demographic is that most are not forming families as early as previous generations and as a result, they are not looking for a standard 3/2 home on a cul-de-sac. They are looking for urban living rather than suburban living. However, home prices tend to be higher for homes closer to major cities. Prepare your clients for the reality that they might have to look outside the city limits if affordability is an issue.
We all want our clients to be happy and satisfied. The more they know upfront, the happier they will be in the end. With your help, your clients can find a home they love and can afford!
In October 2014, Keller Williams initiated a new five part blog series, Market ahas. The quarterly series is designed to help our associates better serve as their clients’ local economists. The topics covered each quarter are mortgage rates, unemployment, price change/affordability, inventory, and GDP. This is the third article in the series for Q4 2014. Read more Market ahas here!