With rent and home prices increasing in recent years, more people are feeling priced out of the housing market. That higher rent makes it more difficult to save up the greater sums needed for a down payment and closing costs on a home.
While market conditions are beyond your control, there are some steps you can take that will get you closer to being able to afford a home.
- Being priced out of buying a home may be due to factors outside of your control, such as the housing market.
- You can try expanding your search area to find more affordable housing.
- Consider looking into different programs, such as government-backed mortgages and down payment assistance, to help you afford a home.
Being priced out of the housing market means that home prices are too high for you to afford one. If that’s how you see the market, it’s good to remind yourself that you’re not alone, and that it’s not your fault. Here are some of the reasons why first-time homebuyers find themselves priced out of the market.
1. High rent makes it difficult to save
Depending on where you live and how much you make, rising rent can make it more difficult to budget for savings to afford a home. At the end of 2022, the national average rent-to-income ratio rose for the first time to 30%. That was enough for economists to declare the United States rent-burdened for the first time.
One reason why rent has increased so much is that aspiring homebuyers who can’t afford a home need to continue renting, which increases demand for a limited supply of rentals. Saving enough to afford a down payment and closing costs — as well as the other costs of buying a home — becomes more difficult.
Rising home prices leave many aspiring buyers priced out of the market. The median sales price of homes sold in the U.S. increased from $327,100 in the fourth quarter of 2019 to $467,700 in the fourth quarter of 2022. That’s an increase of over $140,000, or 43%, in just three years. This inflates the amount needed for a down payment — usually at least 3% — and closing costs, which run 2% to 5% of the sales price.
Even if you can afford those expenses, borrowing more means your monthly payment will be higher. Factor in other costs — such as home maintenance, private mortgage insurance, homeowners association fees, property taxes, and homeowners insurance — and buying a home can become even more cost prohibitive.
Even if you find a home that you can afford, higher interest rates are another factor that could put the monthly mortgage payment out of your reach.
As of April 2023, average mortgage rates are 6.28% for a fixed-rate 30-year home loan, compared to 3.05% back in December 2021. If you were to purchase a home for $400,000 with a 20% down payment, you would be paying $1,969 per month at a 6.28% interest rate, excluding homeowners insurance and property taxes. A few years ago, it would have been $1,358 per month, assuming a 3.05% interest rate — a difference of $611.
Life happens, and it can mean that you’re finding it difficult to save money, or you can’t find other ways to afford a home. Maybe your income dropped, bumping up your debt-to-income ratio and disqualifying you for a loan. Or maybe you had an unexpected financial emergency and used some of your down payment savings to cover it. Whatever it is, sometimes your financial situation could make buying a home out of reach right now.
If your area is currently experiencing a seller’s market, it could mean that there are a lot of people wanting to buy homes and not enough available to buy. Sellers may be able to price their homes higher than what you can afford, or other bidders are making offers higher than yours.
Just because you’re priced out of buying a home right now doesn’t mean you’ll never be able to afford a home. Here’s what you can do when housing is too expensive to prepare yourself to buy a home.
Working toward paying down your debts will improve your credit score and decrease your debt-to-income ratio, which shows mortgage lenders how much of your income goes toward paying your debts. The lower your DTI ratio, the more money you have available for other expenses — like a house payment.
“If a buyer pays off a high debt, that debt’s monthly payment can be redirected for approval toward a higher monthly mortgage payment,” says Mihal Gartenberg, an associate real estate broker with Coldwell Banker Warburg.
Adding as much as you can to your savings is always a good idea. The more savings you have, the easier it will be to save up for a down payment and closing costs. It also helps show lenders that you’re financially responsible, and can come in handy for home repairs or maintenance tasks that crop up.
Though the specifics of how much you should save will differ, consider aiming to set aside enough for how much you think you’ll pay in closing costs and the amount you plan on putting down for your home.
If you can afford to cut back or avoid large expenses, that money can go toward saving for a home and mortgage payments. Avoiding large expenses means holding off on purchasing big-ticket items that would require you to take out a loan, like buying a car. That way, you could potentially decrease your DTI ratio and not increase the chances of stretching yourself too thin financially.
Plus, avoiding taking on new debt could ensure you don’t negatively affect your credit score. Applying for new credit can temporarily ding your score, and if you miss payments, it could also make your score go down.
4. Reevaluate your needs and wants
While it’s nice to imagine moving into a perfect home where you don’t want to change anything, the reality is you’ll likely have to compromise. If you’re discovering that you can’t find an affordable home that meets all your requirements, it may be worth reevaluating your wants and needs.
Having fewer requirements may help expand your list of affordable homes to potentially buy. While it could mean buying a smaller home than you’d like, or forgoing a feature like a wraparound porch, the trade-off could be worth it to get you into the homeownership club.
The reality is you could be priced out of the housing market because of the area you want to live in.
“Real estate is all about compromise and if you can’t afford their dream home in their favorite neighborhood, you can reconsider neighborhoods and choose one with a lower price per square foot,” Gartenberg says. “Even within the same city, you can find diverse neighborhoods with varying price per square foot.”
While it’s tempting to think you can find an affordable home without a real estate agent — and possibly save yourself the commission — an experienced real estate agent can be invaluable. Such an agent knows the area well, has worked with many homeowners to buy a home, and can show you properties that are within your budget.
Even if you’re not ready now, real estate agents usually are happy to help you out no matter where you are in the homebuying process.
“I have worked with clients up to a year or more before buyers are ready to make a move to help them prepare for the purchase process and connect with a lender who offers the type of financing they are looking for,” says Ashlee Mecham, a real estate agent with Berkshire Hathaway HomeServices in Salem, Oregon. “Real estate agents are also aware of many down payment assistance programs and which lenders do or do not offer which programs.”
Aside from conventional loans, there are other types of mortgages that can help make buying a home more affordable. For instance, government loan options from the Federal Housing Administration, Veterans Affairs, or Department of Agriculture offer loans with competitive terms for qualified borrowers. VA and USDA loans require no down payment, and borrowers can buy a home using an FHA loan with 3.5% down.
Down payment assistance programs can make a big difference in helping first-time buyers afford a home. There are several types, including grants that don’t need to be repaid, and some that work more like a loan. You also could take out an interest-only second mortgage and put the loan proceeds toward your down payment.
“No matter what type of assistance program you are considering, look into the fine print and make sure you understand the terms and if there is any commitment for you to pay back the funds,” Mecham says.
If you are single and can’t afford a home on your own, you could consider buying with a friend.
Of course, there are drawbacks to this decision, so it’s important to clearly outline the expectations when all of you are homeowners together. Some examples of what to discuss include how to split the mortgage payments, how much to contribute toward home maintenance, and who will live in the house.
You’ll also want to consider whether you want joint tenancy — where you have equal ownership of the home — or tenancy in common, where you own the home in unequal shares. It’s important to talk about what happens if one person can no longer afford to make mortgage payments.
All of these are reasons why it’s a smart idea to draft up a legal agreement, so everyone understands what’s expected of each owner.
Rent-to-own homes are properties where you start out renting the home and the seller remains the owner of the home. You then become the homeowner after you make payments for a certain period of time — your rent or part of it typically is credited toward the down payment — and outright buy the home. You also can choose not to purchase the home, and let the lease expire.
While these arrangements can make it more affordable to purchase a home, it’s important to read the fine print and understand the terms of the deal. In some cases, you could be paying more money in the long run.
Here are answers to some frequently asked questions about being priced out of buying a home.
Not necessarily. You will have to pay different expenses, such as homeowners insurance, property taxes, home maintenance, and any renovations you want to do.
Buying a house isn’t right for everyone. Some arguments against owning a home include mortgage payments you can’t afford, not having enough money to make a down payment, a high DTI ratio, and not being ready for the responsibilities that come with owning a home.
In some cases, it could mean that many buyers are priced out of buying homes. It could also make it more difficult to buy a home if there are many interested buyers bidding on the same house.
Don’t feel too discouraged if you can’t afford to buy a home right now. By taking consistent action — such as lowering your expenses, paying off debt, and even making some compromises on what you want in a home — you will be on your way to becoming a homeowner down the line.
- Moody’s Analytics (2023)