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Overcoming the affordability squeeze
First-time home buyers facing difficult market conditions
By Cecily Fraser, CBS.MarketWatch.com
Last Update: 4:33 PM ET Nov 3, 2000
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SAN FRANCISCO (CBS.MW) - First-time home buyers know how
monumental the decision to purchase a house can be -- that is, if they can
afford one.
Housing affordability has slid to levels not seen in a
decade, according to a recent report from the
National Association of Realtors. The association's
first-time homebuyers affordability index fell 1.3
points in the third quarter to 73.6, pricing many
first-timers - who account for 42 percent of U.S.
home sales - out of the market.
NAR chief economist David Lereah said the
decline highlights the market's sensitivity to changes
in interest rates -- the single biggest factor in
entry-level housing affordability.
During the third quarter, "a combination of higher
mortgage rates and higher prices particularly hurt
the low income and first-time home buyer," he said.
In recent weeks, mortgage rates have stabilized somewhat from high
levels seen in the third quarter. The 30-year fixed rate has remained below
8 percent. Still, it's any economist's guess where rates are headed for the
remainder of the year.
"Going forward it looks a bit better because mortgage rates have come
down and the economy remains strong," Lereah said. "Home prices are
definitely up, and that does hurt a bit."
The NAR's index revealed that a typical first-time buyer household, aged
25 to 44, with an income of $29,288, had 73.6 percent of the income
needed to purchase a typical starter home with a 10 percent down
payment. The median starter home price was $121,400 during the third
quarter, up from $115,500 a year earlier.
First-time buyers are in "fairly" good shape in much of the Midwest and
South where prices are relatively low, but the situation in high-cost areas
in the Northeast and West Coast is becoming critical, the NAR said.
A difficult market
David Walter, a Century 21 realtor in Westlake Village, Calif. said there's
no doubt that prices will continue to climb in that Los Angeles suburb due
to a tight housing supply. He said he's telling clients there's no reason to
think if they wait a year and delay a purchase that they can get a better
deal.
Walter is advising first-time buyers to "get yourself pre-qualified, let's get
out there and find something, and if you like it, jump on it immediately. Do
expect that you will have to pay full price and possibly do an overbid to
get the property."
Kate Brasco, owner of Century 21 Shawmut Properties in Brighton,
Mass. said market conditions are just as difficult in the Boston suburb she
serves, where the average 3 bedroom, 2 bath home is selling for
$375,000.
First-time buyers are going to have to settle for less, or decide to move
out of the city, she said. "Either you want the convenience of getting on the
express bus to Boston, or you want to drive an hour where there's
inventory out there, and for what you could buy a condo [in Brighton] you
could probably buy a house out there."
Strategies
With so much uncertainty in the market, it's important for prospective
buyers to do some prep work before starting the home buying process,
experts say. The Mortgage Bankers Association of America offers a few
tips.
Can you afford a home? The association's rent vs. own calculator
can help determine what's best for you. For most people, home
ownership can be achieved - especially with some of the special
programs for first-time buyers, experts say.
Before you begin shopping for a home, it's important to have an
idea of what you can afford. As a general rule, most Americans can
buy a home with a value of two to three times their annual
household income, depending on savings and debts. Check out the
"what home can I afford" planning tool.
Start talking to mortgage broker. A lender can work with you to
figure out how much house you can afford and direct you to special
mortgages for first-time buyers.
Brasco said homebuyers should keep an open mind when deciding what
they can afford. "If they can't buy a two family, at least try and get into a
condo. It's a stepping-stone. In three years, they'll sell it, but at least they
are earning equity and not throwing rent out the window."
On the flip side, realtors and lenders need to focus more on first-time
homebuyers, which consists of many minorities and low-income people,
the NAR's Lereah said. "The focus needs to be turned to that type of
borrower and design mortgage products that fit their needs." |
