Abacus: The Reality Of Buying Your First Home

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As we grow older and accumulate wealth, it’s only natural we start to plan for our future. With the start of the home buying season coming in spring, those plans could include purchasing your dream home. However, the housing market is proving to be quite a challenge now, particularly for older millennials. Nevertheless, the market is not as unwelcoming as data might show.

 Source: Freddie Mac

Source: Freddie Mac

According to data from Freddie Mac, the Fixed-Rate (FRM) and Adjustable-Rate (ARM), mortgages have been increasing since the final quarter of last year. As of last week, the 30-year FRM is 4.40 percent, looming ahead of the 15-year FRM (3.85 percent) and the 5/1-year ARM (3.65 percent). For those new to home buying and its terminology, a mortgage is a loan you normally take out to purchase homes rather than pay the whole value of the home upfront at once.

Mortgage rates represent the rate of interest you pay for the mortgage. The FRMs have a set interest rate that remains unchanged for the entirety of the loan’s term. Contrastingly, the interest rate for ARMs remain unchanged for a short time, a couple years at most, before it resets to the rate for the market at that time. Until the start of September 2017, mortgage rates were continuously decreasing from the start of last year and rates had not been this high since April 2014.

Higher mortgage rates make housing affordability more difficult for new home buyers, especially with recent predictions of inflation rising which can cause the Federal Reserve to increase interest rates more aggressively than initially expected. These higher rates coupled with the low housing availability make the entry into homeownership increasingly expensive. The limited supply of homes in the market have already put pressure on prices to rise, as – according to the National Association of Realtors – prices have increased by 48 percent since 2011.

Student debt is another factor that impedes millennials who aspire to own a home. Various studies correspond to this sentiment, explaining that increases in student debt have kept older millennials from purchasing homes. Last year, the Fed released a report which found that between 2007 and 2015, homeownership among the bracket of 28 to 30 year-old millennials had declined by at least 35 percent. The Fed’s research also claimed that for every additional $10,000 in student debt a person has, the likeliness that they’ll buy a home before the turn 30 years old decreases by 1.5 percentage points.

Considering the rising student loan debt, it is probable that this dilemma will not go away anytime soon. Earlier this month, data from the Board of Governors of the Federal Reserve System shows outstanding student loan debt has now lunged close to $1.5 trillion. The more student debt millennials must pay back, the longer millennials may have to wait to purchase their first home.

 Source: Bloomberg.com

Source: Bloomberg.com

Although these trends emphasize the difficulty in entering the housing market, there are encouraging signs that purchasing your first home is still within the means of working millennials. In an interview with CNN, Genworth Mortgage Insurance’s Chief Economist Tian Liu claimed that an increasing amount of employed persons becoming first-time buyers has helped the market improve.

According to Genworth’s recent report on first-time homebuyers, 2.1 million of them purchased homes last year. This was 300,000 over the average amount of first-time buyers who purchased a home within a year, responsible for 38 percent of overall family-home purchases in 2017. Liu credits the lower unemployment rate for the increasing number of potential buyers in the housing market and believes that it will sequentially motivate construction toward single-family homes.

This assessment merits evidence from employment data that the Bureau of Labor Statistics’ latest job report provides. As proven by the January job report, the unemployment rate has remained at 4.1 percent for the past four months. The rate of unemployment is even better for older millennials, as the unemployment rate for persons over 25 years old is 0.4 less than last year’s 2.5 percent. Older millennials looking to save money to purchase their first home should be especially excited about these statistics as a tighter labor market means they can look forward to employers raising their wages. Accounting for inflation, last month’s average hourly and average weekly earnings prove wages are beginning to rise as they increased absolutely to $22.34 and $750.62 respectively.

Additionally, the construction of new houses for sale has been increasing steadily since mid-2012. According to the U.S. Census Bureau’s New Residential Sales report, there were 301,000 new houses for sale as of January 2018. Of those houses, three-fifths of them were under construction and the remainder was mostly split between finished homes (21 percent) and homes where construction had not yet started (19 percent) – as has been the trends for the past few years. Though this is far lower than the number of new houses for sale prior to the recession, it shows signs of growth due to increasing demand by first-time buyers entering the market. This can prove advantageous for millennial homebuyers competing with other first-time homebuyers for a purchase.

Aside from the price of your dream home, you must also keep in mind other expenses that come with the purchase. Experts advise that only 30 to 38 percent of your pre-tax income should go toward that purchase and other recurring costs. One of these costs is the down payment, an amount you pay upfront for your home purchase, which is typically 20 percent of the home’s value. While it’s still possible to purchase a home without paying the full down payment, the percent you did not pay upfront would become an additional monthly cost known as private mortgage insurance.

Choosing the right mortgage type is another important decision. The longer the term of the mortgage is, the lower the monthly payments are and the higher the overall cost of the loan will be. Having a good credit score is also helpful, as you become more eligible for lower mortgage rates the higher your credit score is. Some other costs include the purchase of home goods or services related to home maintenance, such as furniture and plumbing to name a few examples.

Given all this information, it might be in your best interest to wait a bit longer to buy your first home. With potential wage growth on the way and tax returns expected to be larger this year, Americans' incomes are expected to increase overall. While this may lead you to believe you can comfortably afford to buy a home, it should be noted that there are other changes on the way that will make purchases more expensive for this year.

Among these expectations are the rise in inflation, predictions of the Fed aggressively increasing interest rates and other fiscal changes. Saving and investing in your surplus income and giving time for your credit score to increase in preparation for buying your first home next year may prove to be a safer bet.