The velocity of change over the last few years -- in the culture, economy and government -- is head-spinning. Inflation is affecting household cash flow; older social values are jettisoned in favor of new ones; and the world seems to be on the brink of geo-political collapse. Navigating life amidst these volatile changes is challenging but not impossible. Key to success in this environment is modifying expectations. The old 1960s song by the Rolling Stones goes: "You Can't Always Get What You Want." The good news, however, is that you can come close, including when buying or selling a house.
Home Values and Affordability
A homeowner usually pays three parties for the privilege of ownership: the seller to convey the house; the lender to pay for the house; and the taxing authority to provide local services. The prices of these commodities -- property, money and government -- are not fixed, and sometimes volatile. Look for example, at what people pay for a single-family house. From January to June of 2022, average sale prices rose by 17 percent. That means a property with a home value of $590,000 on New Year's Day would conceivably sell for $711,000 when summer solstice rolls around.
Plugging this example in, and assuming a buyer puts 20 percent down, yields some telling figures. The average 30 year mortgage rate as of January 1st was 3.22 percent. The monthly principal and interest payment for a $472,000 ($590,000 - $118,000 down payment) home loan would come to $2,046. The summertime sale price of $711,000 down payment demands $142,200 to avoid mortgage insurance. At a 3.22 percent rate, the loan amount is $568,800 and the monthly p&i is $2,446, i.e. a $400 per month hike. With mortgage insurance, the loan amount, and thus the p&i, are higher.
Truth be told, this does not reflect an accurate increase given the rise in mortgage interest rates. As of July 1st, the 30-year fixed rate hovered near 5.74 percent and has sense gone higher. To be fair, geography can affect the rates. For argument's sake, though, the new p&i is closer to $3,316. It is easy to see that a $1,270 difference between winter and summer can quickly price someone out of their dream home -- or even their fallback home. Between home values and rates, both on the incline, many buyers must be sober about what they can afford.
Other Factors Influencing Affordability
OK, you decide to buy a cheaper house at $350,000. Putting $70,000 down, you borrow $280,000 at 5.74 percent for 30 years fixed. Paying $1,632 in p&i each month definitely brings relief as far as it goes. Yet your monthly remittance also includes property taxes and insurance. Taxes on property, regardless of jurisdiction, rarely fall, but frequently rise. Using New Jersey as an example, property taxes climbed $1,500 annually over the last decade. What about homeowner insurance premiums, also escrowed by lenders?
Because replacement materials are soaring in price, so too will the insurance premiums that pay for them. Moreover, a cheaper house may come with a higher crime rate, schools with lower budgets and more traffic, to name a few drawbacks. Security systems, fences and private education may eat into the money you save, and then some.
All Is Not Lost
Still, do not despair just yet. Altering expectations does not always mean settling for third place. Central to making the necessary financial adjustments in this inflationary era is changing the plan, not necessarily the goals. In Part 2 next Tuesday, you will see alternate paths to your desired ends of purchasing a home.