- Wealthy homeowners are getting richer, while first-time buyers struggle
- Housing affordability was already a problem
- Home prices rising faster than incomes
- Increasing the racial divide in net worth
- The Property Line: 4 Market Headwinds Facing First-Time Buyers
- Sellers slam their doors on buyers
- Lower interest rates incite competition
- Lenders become choosier
- Lower rates can't salvage affordability
- What first-time home buyers can do
- 3 Tactics For First-Time Homebuyers In An Outrageous Market
- 1. Work With a Lender
- 2. Compare Your Goals With Your Financial Potential
- 3. Move Somewhere Less Expensive
Wealthy homeowners are getting richer, while first-time buyers struggle
The pandemic has further expanded the divide between people who are thriving financially and those who are barely hanging on. The stock market continues to soar, enriching wealthy investors, while millions of other Americans are work and must rely on unemployment and other benefits.
A similar divide is happening in the housing market. People who already owned high-end property before the pandemic are seeing their wealth grow as the luxury end of the market booms. Meanwhile, being able to afford a new home is getting further reach for those looking to buy in the low- and middle-tiers of the market.
Homeowners with mortgages gained an average of $17,000 in equity in the third quarter of 2020 over the year before, the biggest equity gain since 2014, according to CoreLogic.
Home prices across the board have risen as demand has soared. The pandemic-induced recession brought mortgage rates down to record lows, just as many people sought to relocate to homes offering more space for remote work.
That demand, combined with a shortage of supply of available homes on the market, has helped push the median home price in the US to $310,800, according to the National Association of Realtors. That's 14.
6% higher than a year ago, according to NAR's most recent numbers.
Rising home prices and record low inventory have made it even more difficult for would be first-time buyers, who are also hindered by ongoing economic uncertainty and tightening lending standards.
“Housing affordability, which had greatly benefited from falling mortgage rates, is now being challenged due to record-high home prices,” said Lawrence Yun, NAR's chief economist. “That could place strain on some potential consumers, particularly first-time buyers.”
Housing affordability was already a problem
The homeownership divide had already been growing since 2007, when the Great Recession hit, according to research from the Mortgage Bankers Association's Research Institute for Housing America.
The study found that wealth among US households became increasingly unequal between 2007 and 2016. The bottoming home prices in 2012 and a decline in the homeownership rate through 2015 ate away at household net worth. Median real household net worth dropped from $140,000 in 2007 to $97,000 in 2016, or 30% lower than it was before the financial crisis.
The report said that while real household net worth improved between 2016 and 2019 due to rising home prices and homeownership rates, as well as the stock market's steady climb, those gains are ly to be offset by the economic impact of the coronavirus pandemic.
“Middle-class households did not fully recover from the financial crisis, and the poor saw their net worth turn negative and stay negative,” said John C. Weicher, director for the Center for Housing and Financial Markets at the Hudson Institute, who conducted the study.
“Meanwhile, the rich recovered faster and their share of wealth increased,” he said. “The result is a less-equal America, and many families that fell behind have reasons to worry as they cope with the pandemic and move closer to retirement.”
Home prices rising faster than incomes
One big problem is that the cost of a home is still rising at a pace that is no match for meager increases in income.
Home prices are increasing faster than wages in 53 of the nation's 100 largest cities, according to Point2, a real estate data company. There were 15 cities last year where mortgages alone took up more than 30% of homeowners' income, up from 13 cities where that was the case in 2010.
Homebuyers in the most unaffordable cities would need to earn up to $43,567 more per year to avoid being cost burdened, according to Point2, which noted that this comes at a time when many Americans may have seen household income disappear due to job losses.
Meanwhile as entry-level home buyers are being shut out, those who can afford it are buying larger or more expensive homes.
While there were 22% fewer homes sold under $100,000 in November compared with the year before, largely because of lack of inventory, the number of high-cost homes sold has skyrocketed, according to NAR. Closings for homes between $750,000 and $1 million were up 85% in November compared with the year before, and homes sold over $1 million were up 88%.
Increasing the racial divide in net worth
This rift in homeownership hits especially hard for the Black and Hispanic families who have been disproportionately impacted by the pandemic.
“There is robust home price appreciation and that builds wealth for those who own a home,” said Laurie Goodman, vice president at the Urban Institute and co-director of its Housing Finance Policy Center. “But the Black and Hispanic homeownership rates were a lot lower than Whites to begin with.”
Prior to the pandemic, the White homeownership rate was about 72%, while the Hispanic rate was 48% and the Black rate was 42%, according to the 2019 American Community Survey from the US Census. The pandemic is ly to make this gap even wider for people of color, she said.
“As credit has tightened as a result of the pandemic, you increasingly squeeze out Black and Hispanic borrowers who tend to have a higher debt-to-income ratio and lower credit scores,” said Goodman.
Homeownership is one of the most direct ways to build generational wealth, she said, and while the average Black or Hispanic homeowner has much less wealth than their White peers, a greater portion of their wealth is home equity.
Goodman said the median wealth of a Black homeowner is $113,000 and their home equity is $67,000, and for a Hispanic homeowner the median total wealth is $165,000 of which home equity is $95,000. Meanwhile, the median wealth of a White homeowner is $300,000, of which $130,000 is home equity, according to the Urban Institute's research data from the Survey of Consumer Finance.
“For Black homeowners, way over 50% of their wealth is in their home,” she said.
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The Property Line: 4 Market Headwinds Facing First-Time Buyers
The COVID-19 pandemic has touched all phases of the homebuying journey. Today’s first-time home buyers find themselves flailing in cross-currents:
- Fearing health risks, homeowners have delayed putting their homes up for sale, limiting supply.
- All-time low mortgage rates have encouraged even more buyers to leap into a fiercely competitive market.
- Meanwhile, tighter mortgage standards make it a bit harder for even well-prepared buyers to get loans.
- Average home prices rise higher, faster — beyond the affordable range for first-timers.
These public health and market forces are amplifying affordability issues for first-time home buyers, threatening to delay their dreams of homeownership. To find success, prospective buyers must be persistent, patient and preapproved.
Sellers slam their doors on buyers
Just as the spring homebuying season was gearing up, word came that the novel coronavirus could spread from person to person. Rather than risk exposure, would-be sellers withheld their homes from the market. “People pulled back because they didn't want people in their homes,” says Terri Robinson, a Realtor with RE/MAX Select Properties in Ashburn, Virginia.
As sellers sidelined themselves, the inventory of homes for sale stayed relatively flat instead of zooming upward. In June, 1.54 million existing homes were for sale, a 20% drop from the housing inventory a year before, according to the National Association of Realtors.
A skimpy inventory isn't a problem when demand for homes is low. But even in the pandemic's early days, home buyers outnumbered willing sellers — and the Federal Reserve was about to motivate even more people to go house shopping.
Lower interest rates incite competition
The spread of the coronavirus triggered stay-at-home orders, which spiked unemployment, which begat a recession. Congress and the Federal Reserve firehosed money at the economic downturn to extinguish it. In March, the Fed began buying billions of dollars' worth of mortgage-backed securities to force mortgage rates lower.
The central bank succeeded. The 30-year fixed-rate mortgage averaged 3.86% in January, according to NerdWallet's daily survey. By August it averaged 3.08%, and has remained low since. The dramatic decline gave borrowers more buying power. The prospect of bagging a bargain inspired would-be home buyers to dip their toes into the market.
But these eager buyers discovered that a lot of other people had the same idea. There weren't enough homes for sale to accommodate them. When buyers toured homes and made offers, they discovered they were pitted against one another.
“The competition for those homes becomes much greater,” Robinson says. “That's where the struggle is.” She recently closed a sale on a condo that attracted 12 offers in four days. It sold for $15,000 more than the asking price. It's the type of home frequently bought by a first-time home buyer — and the competition for those homes is intimidating.
Lenders become choosier
Spooked by coronavirus-related unemployment, mortgage lenders adopted stricter lending standards. Some lenders now require mortgage borrowers to fill out a COVID-19 certification in which they attest that they expect to make the monthly payments.
In another sign of tighter lending requirements, the average credit score on a closed mortgage was 750 in July, compared to 738 in January. That's a sizable jump in just six months.
Lenders have become more conservative with mortgages backed by the Federal Housing Administration as well.
Some lenders won't approve FHA loans for borrowers with credit scores below 620, says Jim Sahnger, a mortgage loan officer for C2 Financial Corp. in South Florida.
Such a policy disproportionately affects first-time home buyers, who benefit from the FHA’s more relaxed qualification requirements.
Lower rates can't salvage affordability
Combine a small selection of homes, a rate-induced influx of home shoppers and stricter lending requirements. The result? Home prices that rise faster than incomes.
Home affordability for first-time buyers has fallen this year, according to NerdWallet's most recent Metro Affordability Report. A home is generally considered affordable if it costs no more than three times annual income.
But most first-timers have to stretch well past that budgetary ideal, according to the report. House prices rose nationally from 4.5 times typical first-time home buyer income in the first quarter to 4.7 times in the second quarter.
First-time buyers tend to make smaller down payments than repeat home buyers, so they often borrow a higher percentage of the home's price. That results in larger monthly mortgage payments, further reducing affordability.
What first-time home buyers can do
First-time home buyers should keep these tips in mind as they navigate the unexpectedly hot housing market:
Be persistent. Robinson stresses to her clients that they might have to make offers on a few homes before they succeed. As clients internalize this message, they're more resilient in the face of disappointment.
Identify the bottom line. Robinson asks buyers she represents, “If you were to lose this house over $500, would you be upset?” If they answer yes, she asks if they want to raise the offer by $500.
Then she asks again, until she finds how much the client is willing to pay.
That amount might not be the initial offer, but by establishing an upper limit upfront, the client is better prepared to walk away from a bidding war.
Get preapproved to gain a competitive advantage. When home sellers weigh multiple offers, they favor deals that are ly to close. That's why they favor buyers with mortgage preapprovals, Sahnger says.
Consider waiting out this weird housing market. Some buyers might conclude that it's prudent to hold off until the recession ends and their employment is more predictable. That gives them time to bundle up a bigger down payment — and maybe snag a more expensive house.
3 Tactics For First-Time Homebuyers In An Outrageous Market
Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
If you’ve shopped around for a home recently, you’re probably familiar with feelings of despair, confusion and annoyance. Homes are getting snapped up PlayStations at Christmas and, if you’re lucky enough to find a house in your budget, you might end up competing with multiple bidders.
Home sales got off to a slow start in 2020 because of the pandemic, but they picked up in July and have been accelerating since, easily lapping 2019 numbers—back when we didn’t have Covid threatening jobs and the economy. With people stuck at home or in tiny apartments in packed cities, it made sense to look for better digs. And it seems many people had that same idea.
In November 2019, home sales were up 3.1% year over year. A year later, November 2020, sales outpaced 2019 by 25.8%, according to data from the National Association of Realtors.
The problem is new home construction isn’t keeping up with demand. So now you have investors and buyers fighting for fewer homes, which is pushing prices up.
“Despite the ongoing economic impact of the pandemic, households seeking more space, assisted by low mortgage rates, drove the demand for new homes higher,” said Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association.
This market is particularly treacherous for first-time homebuyers. Without a hefty down payment or a strong credit score, buying a house can be nearly impossible. This leaves priced-out buyers with one option: make a long-term plan.
But all hope is not lost. Here are three things you should do to help land that first house in 2021.
1. Work With a Lender
If you’re completely in the dark about whether you qualify for a mortgage—which is common if you’ve never gone through the mortgage process before—start by talking to a lender or a mortgage consultant.
They’ll often start with basic financial questions about your income and assets, but the real clarity comes when you apply for a loan.
“Prequalification tells you roughly how much you can afford what you report about your down payment, assets, credit and income, and it can uncover any obstacles you might face when it comes to securing your financing,” says Ryan Dibble, chief operating officer at Flyhomes, a Seattle-based real estate startup.
If your lender or a mortgage consultant pulls your credit report, that will give them even more insight into your creditworthiness. They’ll be able to pinpoint any problem areas in your financial history and advise you on next steps.
“In some cases, the mortgage consultant may have a sufficient credit profile to work with and collect income documents along with assets and issue a preapproval,” says Paul Appleton, head of consumer lending at Union Bank in San Francisco. “In other cases, the mortgage consultant may advise the client to pay off a charge off or bring a delinquent account current prior to re-pulling credit in 90 to 120 days.”
In essence, a good lender can navigate you through the process of getting your finances in order and matching you with a loan that makes sense for your budget and financial goals. The more experience they have, the more programs they’re ly to know about, such as down-payment assistance programs or specialty programs that banks, online lenders and credit unions might offer.
2. Compare Your Goals With Your Financial Potential
It might be frustrating to see friends and family become homeowners while you struggle to make rent. But keep in mind that motivated buyers are often willing to make serious sacrifices for homeownership.
So, what looks a simple transaction might really be the fruit of years of saving, working extra jobs and living well below their means in order to access homeownership. Or they could have inherited money they used to make a big down payment. Whatever the case, every situation is unique, so don’t compare yourself and don’t be limited by today’s setbacks, especially in today’s tough market.
If you find that you can’t afford a home in your area on your income—either because of bidding wars or lack of inventory—then it’s time to compare and consider different scenarios. Figure out how much more you would need to earn in order to buy a home. Once you have that number, you can move onto step two: increase your income or decrease your spending.
Do you get another job? Cut back on expenses? Ask for a raise? Increase your skill set (and income bracket) by getting a specialized certification or going back to school? Obviously, this isn’t a quick-fix solution, but buying a home can take years, so don’t worry if you need more time.
Some people consider their retirement savings as part of their “financial potential.” After all, $100,000 lying around in a half-forgotten 401(k) account can look an awful lot the down payment to a dream house. And when homes are scarce, they are now, it can create pressure to buy at all costs.
But leveraging your retirement to snag a home could be a devastating mistake. Experts roundly agree this is an unwise move that can cost you down the road, so definitely talk with a financial professional before you go down that path.
The bottom line is that you want to create options for yourself—both now and in the future.
3. Move Somewhere Less Expensive
If you want proof that Americans love homeownership, all you have to do is look at the moving trucks. People will move across the country to become homeowners—San Francisco to Austin, Los Angeles to Boise, Manhattan to Montclair.
This might seem extreme, especially if you have a strong network, family ties or a job that requires your presence. But for some motivated buyers, moving is just part of what you have to do if you happen to live in a pricey city.
Steph Baker, a Sacramento-based real estate agent at Dunnigan Realtors, has seen firsthand how skyrocketing home prices have forced people to move. Sacramento is a refuge for techies fleeing the exorbitant cost of Silicon Valley. She describes the current market as “ferocious,” as she recounts how the last house she sold had 18 offers.
“Most of the bidders were investors. It’s completely changed from two years ago,” Baker says. “Back then, if you wanted to buy a house, you could buy a house. Now, it’s not a slam dunk. You’re up against a lot of people, so it just drives up the price.”
Recently, Baker started working with a teacher who is having a hard time finding a home within her budget in Sacramento, so Steph recommended that she look at good school districts outside of the city to expand her options.
“There are nearby areas that are less expensive and have less competition, so it makes sense that she looks in other places,” Baker says.
Home prices are not the only consideration. Income tax, property taxes and cost of living (food and utilities) all play a role in how much you’ll spend on just living in a certain area. So if you have a tight budget, places that offer lower and fewer taxes can be a huge money saver. This is, after all, money that can be put toward a mortgage or down payment.