First-Time Home Buyers Pain—Be “Savvy”

As we begin the new year, I am thinking about our first-time home buyers and their potential “pain” in the real estate marketplace.

The American dream has been—since the 1950s—to own a home. This dream is still strong in 2024, but we need to be financially “savvy.” Home prices are much higher, mortgage rates are hovering in the 6-7% percent range, housing inventory is stretched (unless one includes new builds at 650K+), and millions of us baby boomers and others don’t want to sell our homes.

To the right is a challenging purchase example for first-time buyers. Thank you, Matt Carroll, Senior Loan Officer at Cherry Creek Mortgage!

Please note: This is not a specific example and final numbers will vary.

What First-Time Home Buyers Should Consider

There are several things first-time home buyers need to consider, including that they should:

1) Be knowledgeable about programs that provide down payment assistance or loan down payments with favorable payback terms.

2) Consult with families and friends to see if a joint ownership model with shared costs may help.

3) Speak to their financial planner to understand how to use a financial gift for a down payment.

4) Be open to multi-generational options or multi-unit options.

5) Think about their first home purchase as a “steppingstone” to gain wealth through real estate investing and not as a long-term real estate dream.

When To Consider Renting Instead of Buying

Then again, there are reasons to rent instead of purchasing a home. I’ve worked with clients over the years who have been able to afford large rental payments but cannot buy. During a recent seminar I attended, an economist presented a good rule of thumb to lean toward renting instead of buying if the purchase price of the home divided by the annual rental ratio is below 18.

Returning to Matt’s example above, a 500K condo that rents for $2500 a month is generally more affordable than the 500K purchase.

$500K divided by total annual rental payments of $30,000
equals between 16 and 17, which is below 18.

The value of renting is that, in the short term, it may be a first step toward financial and personal freedom. But if one rents, one misses a return of equity and the overall value increase of the home.