by Dave Kutcher
Home ownership has always been an important milestone for folks moving into adulthood. Similarly, moving from the “starter home” to something more substantive is also a sign of folks “moving up” in their financial life. However, the perfect storm is wreaking havoc on Americans wishing to follow the aforementioned process … and people are stuck right where they are now with little evidence that they will be able to move in the near future.
There are three things impacting the US housing market in a big way; interest rates remaining high, perhaps the highest most young folks have ever seen in their lifetime, low inventory of available starter homes in a suitable price range and the near record prices for homes in general.
This situation leaves two groups in a pretty tough spot; those seeking their starter home now and those seeking to move up from their starter to something bigger and more suitable, perhaps, for a growing family.
The home equity built up over the initial years of ownership as well as increased wages and likely stronger financial substance used to lead to opportunities to trade-up into larger, more suitable homes, but current economic conditions are bringing the starter home as well as the initial trade-up purchase to a stand still.
With the cost of building materials extremely high, builders aren’t looking to build smaller starter homes since the resulting price puts these homes out of reach for many first-time buyers. So, the next place to find a starter home is to find one where someone is trying to trade up themselves.
Unfortunately, the inventory of sales is way down because folks seeking to trade up are running into a brick wall in terms of what they can afford with the forces at work against them in the current market. Since they cannot find a suitable and affordable alternative to trade up to themselves, they are staying put for now and this results in less and less available for someone looking to break into homeownership or the first time.
Higher prices for homes seem like a good thing, right? Well, perhaps if you are selling in today’s market and aren’t in need of a replacement home that would be true, but while your home may have increased in value significantly since you bought it, you aren’t going to replace it or move up in the home markets without facing the same increases on your target home that you enjoyed on your existing home … so, you build up significant equity to bring to the table, but find the cost of what you are seeking as an upgrade to simply be out of reach when factoring in financing costs.
Moving from your current home to a new one means you are going to give up your current mortgage and seek a new mortgage for the upgraded home you wish to buy. With interest rates double what they were just a short time ago, the cost of financing a home purchase has risen significantly, roadblocking many folks who are on their journey to find their next home as their family grows.
To give you some perspective on this, even if you were to sell your home today and move to an identical home, your monthly mortgage payments would likely be twice as much as they are for you today and that just isn’t going to work for most people. And nobody is really trying to find an identical home to what they are in today … they are seeking something more; more bedrooms, more baths, more creature comforts and perhaps more land.
When you factor in the higher cost for more substantive housing coupled with interest rates higher than your original mortgage, it isn’t rocket science to figure out that this leaves most people unable to trade-up.
So, the perfect storm is making things very difficult for many people and the impact of the storm may result in a very unfriendly residential housing market.
Buckle up folks, times they are a changing and current conditions in the economy do not bode well for those at the front end of home ownership.
We preach living within your means all the time. We stress the importance of always having adequate savings on hand, and we have demonstrated in prior articles the importance of maintaining a good credit score to access the very best financing arrangements available.
Making these three things a priority in your life is as important as ever in the current environment. Good credit equals lower interest rates for borrowing and having additional savings on hand means you can opt to put more money down on a home you may be seeking, thereby lowering the amount you need to borrow.
It is not going to be easy over the next 12-24 months … be diligent in your efforts to put yourself in the very best position of strength financially. You will be glad you did.
My name is David A. Kutcher, a retired Marine Corp Captain. My business partner in the lower 48 is Richard C. Scott, CLU, LUTCF. For nearly 40 years we have been helping folks with their personal retirement decisions. We encourage you to make an appointment and get ahead of your concerns as early as is possible. You can catch us on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio and on Tuesday mornings, KFQD News Talk Radio AM 750 and FM 103.7. Frontier Retirement, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452.
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