This time of year is a time of milestones: high school and college graduations, the start of internships and apprenticeships, first jobs and next jobs, and the beginning of military service.
Many of us progressed through these milestones in our early 20s and we also knew that homeownership was the next milestone on the list. However, over the past few years, things have changed for young buyers. The average age for a first-time home buyer has increased from age 30 in 2010 to 38 today.
We were each able to buy our first homes in our late twenties. Our homes were modest, but they got us into real estate and allowed us to trade up to a bigger home when we had a family.
But today it is harder to get that start. Since the pandemic, the younger generations have been significantly impacted by rising home prices, the dramatic increase in interest rates, and the increase in rental rates. In Arizona, the income needed to afford the average rent of $1,853/ month is $74,101 per year. That is a 35.9% increase since 2020.
The higher rents have made it harder for younger people to save, which has further compounded the challenges of achieving homeownership. We are currently working with a first-time home buyer who has done all the right things. She has solid work experience, great credit, and has saved enough for a 3% down payment. She was recently prequalified for a $400,000 purchase, which means she needs approximately $18,000 for the down payment, prepaids, and closing costs, plus around another $1,000 for home inspections and other related expenses.
At an interest rate of 6.9%, her payment, including principal, interest, taxes, homeowners insurance, and mortgage insurance (required by the lender if putting less than 20% down), is about $2,850 per month – not including any HOA fees. If rates dropped to 5% (or she had additional cash to buy down the rate), that payment would drop to $2,375 per month.
The news is full of headlines that say, “Housing is Unaffordable,” but we have watched many first-time homebuyers make their first purchases. The secret to success for each of them has been forward planning and saving. Homeownership remains an amazing pathway to building wealth. It allows for a stable housing payment (unlike rental rates), offers housing security, tax benefits, and provides an opportunity for equity growth. How can you make a plan even if it is five years from now? Here are five steps you can start working on now:
- Meet with a lender.
Even if your first home purchase is years down the road, talk to a lender and figure out your path. Starting with the end in mind and finding out how much you need to save and earn to buy a home will help provide a pathway for you to achieve your homeownership goal. - Become financially literate.
Listen to financial podcasts like the Money Guy or Dave Ramsey, understand your spending habits, pay down debt, and protect your credit. Buyers with lower debt to income ratios and higher credit scores get more favorable interest rates. - Share your goal with friends and family.
Save your birthday money and pick up odd jobs to help you save money toward your goal. Even work on finding a friend who is willing to rent a room in the home you plan to buy one day. We are seeing many first-time homebuyers do this to help make owning a home more affordable. - Adjust your expectations.
There are starter homes out there under $400,000 – they may not be the cutest, the closest, or the most updated, but they will allow you to get your foot in the door. Fixing up a home adds value (sweat equity!) and will allow you to develop new skills, too! - Small steps yield big rewards.
When you started high school or college, you did not get a degree on day one. It took years of chipping away at the credits to get your diploma. Affording your first home is similar. Saving $300 per month for five years will get you to a down payment and you will be so proud of your hard work when you get there!
Parents and grandparents, we encourage you to share this information with your children and grandchildren. Also, share your own homeownership journey and what your successes have been in real estate. Seeing what you have accomplished will help your children and grandchildren understand that they can be successful, too!