Becoming a Homebody
If you stand by the proverbial water cooler at Meridian, you are bound to hear one of us lamenting about the never ending home projects / renovations (ahem, I am looking at myself), finishing a move into a new home, looking at buying a first home, planning weekend home projects, and really everything under the HGTV sun. Maybe we are just rubbing off on one another, but I actually think we are part of a much larger trend. A topic which seems to be coming up more and more, particularly with our younger clients has to do with the one place everyone has spent more time over the last few months. It’s where the heart is… the home.
The below are some facts from July home sales from CNBC showing that more people are wanting to buy and at the same time, less people are wanting to leave their homes leaving the supply low and driving the prices up.
Sales of existing homes soared 24.7% in July from June, according to the National Association of Realtors.
The supply of existing homes plummeted 21.1% annually, with just 1.5 million homes for sale at the end of July.
The median price of a home sold in July rose 8.5% annually to $304,100.
Not surprisingly, the amount of expenditures related to home improvement showed an increase over the last few months whereas most other non-discretionary expenses have decreased. The chart below captures the monthly debit / credit card spending during the beginning of the pandemic.
Buying a first house or a new house is one of the largest (if not the largest) purchases one will make in their lifetime and for most young investors, it will end up being the largest asset on their balance sheet. On the flip side, unless independent wealth is a factor, this purchase will also generate the largest liability of one’s life. However as daunting as that may seem to first-time home buyers, preparation, staying knowledgeable, and maintaining realistic expectations are key.
One of the first steps first time home buyers can take is to reduce consumer debt to <20% of take home pay. The lower the better. Reduction of debt and on-time payments should help increase a credit score and therefore make a borrower more attractive to mortgage lenders. Interest rates are as low as we have seen in a long time, but that becomes a moot point when you cannot get approved to take advantage of the low rates.
What seems to be the most asked question is how much should I save for and how much house can I afford. A prudent rule of thumb is monthly housing costs (including insurance, taxes, principal, interest) should not exceed 28% of gross (pre-tax) income. Overall debt including consumer debt and housing costs should not exceed 36% of gross income.
If you are reading this from Northern Virginia or the Warrenton area, you can imagine how difficult staying within those ratios could be, particularly during early career years! However as is with any investment, putting a plan together and sticking with it will yield the most fruitful outcome. Once the home buyer understands how much home they can afford on a monthly basis, then building up cash and savings for a down payment should be the next focus. In order to avoid private mortgage insurance, buyers should put down at least 1/5 of the purchase price, which could help maintain the monthly housing debt to the 28% ratio.
Continuing to build up emergency savings beyond a down payment is critical as well as it provides a cushion should unexpected expenses or repairs come up… which we all know is a very high likelihood! Houses are like children … it feels like they always need something 😊.
The process of saving for a house and buying a house can feel intimidating, particularly if you don’t know where to start, but the reward for being prudent and diligent with saving certainly pays off over the long term.