Good job, millennials! More of you are achieving the American Dream of home ownership, historically the main path to building personal wealth. But there are still challenges ahead. This posting reviews common barriers first-time buyers face and offers tips for overcoming them – before you ever begin actively searching for a home.
The National Association of Realtors (NAR) announced last week that the rate of US home sales peaked to a 5+ year high last month, in part because the percentage of first-time buyers rose. They accounted for 32 percent of all sales – up from 30 percent in April and from 27 percent a year ago. In turn, millennials account for over two-thirds of all first-time buyers.
This is good news for all homeowners. First-time buyers are a bellwether of trends in the market, which is still recovering from the recession. In making the transition from renting to owning a home, they start a chain reaction that allows repeat buyers to move up the housing ladder.
Still, the proportion of first-time homebuyers is well below the norm of 40 percent. There has been plenty of analysis of this trend over the past year.
- Hardest hit by the recession, young people have faced higher unemployment rates, more part-time work and lower incomes.
- Many carry large student debts.
- The cost of renting has risen along with home prices, making it more difficult to save money for ever-larger down payments.
- Inventory of the lowest-priced homes has decreased.
- Post-recession lending standards and terms have put mortgages out of reach for many millennials.
NAR attributes the May rise in first-time buyers to rising employment rates among young adults and a friendlier lending environment. Last December, for example, the housing finance giants Fannie Mae and Freddie Mac introduced a 3 percent down payment program for borrowers with a minimum FICO credit score of 620. NAR thinks the housing market will likely see more newcomers in the months ahead, but cautioned that further increases will depend on how much home prices and mortgage interest rates rise.
Finding a good house at the right price is especially challenging for Portland millennials. In May the Metro area had a home sales inventory of just 1.7 months compared to a national average of 5.1 months. As explained in my posting of May 14, low inventory has created a hot or lopsided seller’s market with multiple offers, quick sales and rising prices. Competition is especially fierce at lower price points, which are usually most attractive to first-timers.
What’s steps can you take now to lay the groundwork for breaking into Portland’s hot market?
- Estimate how much mortgage you can afford. HouseLogic and Realtor.com explain how to go about it. Itemize your current monthly expenses. Include a monthly average for irregular items like car maintenance and vacations. Exclude what you’re paying for housing now, such as rent, utilities, and parking. Subtract the total of these expenses from your net monthly income. The balance is what you can afford for homeownership each month, including the mortgage payment, insurance, property taxes, utilities, maintenance and repair, and any homeowner association fees.
- Save for a down payment. Having itemized your monthly expenses, you’re well on the way to creating a monthly budget. Put expenses into 2 categories: needs and wants. Brainstorm ways to reduce the cost of needs. For example, Portland rents have skyrocketed over the past year, rising nearly twice as fast as home values. Can you move in with family temporarily or find a roommate or cheaper housing? Try to eliminate as many wants as possible from your budget.
- Review and strengthen your credit. Your credit score is a key factor in qualifying for a home loan and the rate of interest you’re charged for it. As part of Task 1, get a free credit report here. HouseLogic offers 7 tips for improving your score.
- Track changes in your financial position over time and revisit your goals and plans. You’ll want to revise your estimate of what you can afford as you go through Steps 1-3. For example, the more money you save for a down payment, the less you’ll need to borrow and the lower your interest rate will be. Or the higher you boost your credit score, the lower your interest rate will be. In either case, you can reduce the total cost of buying a home and your monthly payment. Or you can buy a more expensive home (and take on a larger mortgage) without increasing your monthly payment. Try playing around with a mortgage calculator to see how this works.
- Visit Homeownership Opportunities Website Northwest. I’ve saved one of the best tools for last. Sponsored by Portland’s realtors association, “HOWNW” aims to educate and empower consumers. One menu tab provides information about the homebuying process. A second connects visitors to homebuying workshops across the city. And a third offers customized searches for programs that help people with lower incomes, little or no down payment or lower credit scores get into a home of their own.