Several decades ago (and earlier) home buyers would wait to purchase a home until they had at least 20% of the purchase price saved up in their bank account, and they would only buy if they were going to stay in the same home and town for many years. At the time, the percentage of homes that were owner-occupied hovered between 40% and 50% (U.S. Census Bureau).
Just a few short years ago, home buyers were buying with no down payment at all (or less), even if they planned to stay in the house for only a year or two. This led to an ever increasing homeownership rate, which peaked at 69.2% of families owning their home in the early 2000’s (U.S. Census Bureau).
Why the sudden change of pace? And what is a buyer to do today?
Many of today’s first time buyers are still buying with a very small down payment, and that can be o.k. Many loan programs are available with a small down payment, such as the FHA loan program which only requires a 3.5% down payment. The risk here is that a buyer doesn’t have too much built-in equity in case they need to sell sooner than they think. Purchasing a $100,000 house with a 96.5% FHA loan results in a $96,500 loan, which has only been paid down to $95,000 one year later. With such a small down payment, it can be difficult to re-sell the home in a short time frame without bringing cash to closing.
As becomes evident, the down payment and the length of ownership are quite intertwined. As shown above, a small down payment with a small length of ownership can be financially difficult. A small down payment with a longer length of ownership can work just fine. Conversely, a larger down payment provides security and makes even a small length of ownership feasible.
What may become clear here is that homeownership is not for everyone. Even if a buyer is making great money in their current job, if there is a strong chance they will need or want to leave the area in 12 or so months, it may not make sense for them to buy. But for those with good credit, a down payment of some sort, and a solid job that will keep them employed and in the same geographic area for the next 3, 4, 5, 6, 7 years – homeownership may be a very exciting option right now. With low interest rates, lots of homes on the market, and many sellers ready to negotiate, this can be a most opportune time for buyers to act.
Owning a home is a passive savings account of sorts, with money accruing as the principal of the mortgage is paid down each month. Owning a home also provides the ability to establish oneself in a neighborhood that may be a buyer’s home for years to come. Finally, owning a home provides the ability to invest time, energy and money into the place that you live that will provide a future resale benefit – as opposed to painting, re-modeling or otherwise improving a property when leasing it.
Now being excited about buying and thus owning a home, many might look around and realize that most local real estate markets aren’t booming right now. Is it wise to invest in real estate when the market, and prices are down? Many think that it is wise, given that buyers can fix their housing costs when prices are potentially the lowest that they’ll ever be, and when interest rates are potentially the lowest that they’ll ever be. In many ways, housing costs compared to what a buyer is purchasing couldn’t be much lower than they are right now.
Buying a home isn’t for everyone, but excellent housing opportunities abound for those who plan to stay in the same geographic area for the years to come.