Lauren Niesz bought a new home with her boyfriend in January after they were able to save more money during the pandemic.
Source: Lauren Niesz
Like many people forced to work from home after the outbreak of the Covid-19 pandemic, Lauren Niesz, 26, found the conditions less than ideal.
Niesz, who rented a townhouse in southern New Jersey, often worked in a closet so she wouldn’t be disturbed by work calls from her boyfriend, who she lives with at work.
In addition, the couple’s now 2-year-old dog often had to go for walks in the neighborhood.
After seeing an online sketch of a brand new home, Niesz contacted her realtor and made her an offer in September. Last month, they closed their newly built home in Howell, New Jersey, complete with a backyard for their dog.
According to Niesz, a technical product manager at Comcast, much of the couple’s progress toward accumulating a down payment happened during the pandemic.
“We were able to save so much money because we weren’t going anywhere or doing anything,” Niesz said.
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A survey by real estate firm Redfin found that stimulus checks and the ability to save more money during the pandemic were among the top ways first-time homebuyers have been saving on their down payments recently.
While the rule of thumb is usually to save 20%, the National Association of Realtors finds that most homebuyers save just 7%, according to Nadia Evangelou, senior economist and director of forecasting at the real estate trade association.
As millennials — the generation born between 1981 and 1996 — are entering the homebuying age, they are facing market conditions that make it even more difficult to buy their first home.
The home inventory for people who typically qualify as first-time homeowners — earning between $75,000 and $100,000 — is at an all-time low. According to Evangelou, in 2021 there was a listing for every 65 households in the starter home category. In 2019 there was one entry for every 24 households.
“We’re seeing a drastic drop in their options,” Evangelou said. “They have fewer homes they can afford to buy.”
Still, there are some conditions that might lure first-time home buyers into the market right now.
Mortgages are likely to become more expensive as the US Federal Reserve considers raising interest rates to curb inflation.
With rents up significantly from a year ago, buying a home would remove the uncertainty of worrying about how much you’ll have to pay next year, said Redfin chief economist Daryl Fairweather.
“At least if you’re buying, you can secure your monthly mortgage payments,” Fairweather said.
Closing a transaction can be more difficult, however, as first-time homebuyers are more likely to compete with multiple home listings, including those from existing homeowners and those willing to pay cash.
Just because you “qualify” for that nice big mortgage doesn’t mean you should definitely take it.
Thomas Scanlon
Financial Advisor with Raymond James Financial Services
That’s exactly what Thomas Scanlon, a financial advisor at Raymond James Financial Services in Manchester, Connecticut, recently saw in a 30-year-old first-time non-customer buyer. The potential buyer applied for a house that received 16 offers. The winning bid was $30,000 over the asking price and the buyer paid all in cash.
Despite the frustrations that come with trying to buy a first home in today’s market, it’s still often the best way to increase personal wealth, Scanlon said.
“Obviously, in the long run, you don’t want to wake up after a decade with a cigar box full of rent receipts,” Scanlon said.
Experts say it’s more important than ever that first-time homebuyers go into a transaction thoroughly prepared, or what Scanlon calls “eyes wide open.”
Start by researching what homes are listed for and what they’re actually being sold for and how quickly those transactions are happening, Fairweather said.
A house in Chicago will be listed for sale on January 20, 2022.
Scott Olson | Getty Images
Taking steps to improve your credit score, pay down debt and perhaps earn more money through a part-time job will also put you in a position of greater financial strength, Scanlon said.
Make sure you have everything you need together – including pre-approval for a mortgage – before you’re ready to bid.
“If you’re viewing a home and you like it, you have to make an offer right away to be competitive,” Fairweather said.
However, it’s important not to get so caught up in a winning bid that you don’t think through all of the financial implications.
If you bid and don’t pay cash for everything, that’s more money you’re borrowing from the bank, Scanlon said.
Reset your expectations
If you’re paying back less than 20%, you’ll need to pay for personal mortgage insurance, or PMI. That could cost about $50 to $100 a month, depending on the size of the home, and will add up over the years, Scanlon said.
However, once you’ve built up about 20% equity in the house, you can have the PMI removed. But the onus is on you to prove it and take the necessary steps.
You may also want to reset your expectations for how much you spend, especially after balancing your mortgage payment with other bills like car or student loan payments.
“Just because you ‘qualify’ for that nice big mortgage doesn’t mean you should necessarily take it,” Scanlon said.
Above all, don’t rush into buying a home now that you might regret later.
“The most important thing is that you buy a house that you can live in long-term because that means you have the best chance of building equity,” Fairweather said.
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