NASHVILLE, Tenn. (WKRN) – While the younger generations continue to look toward the hustle and bustle of city life in popular U.S markets, rising home prices are deterring a number of prospective buyers, especially first-time buyers or low income families.
Zillow found renters will need to save an additional $369 a month in the coming year just to keep up with the forecasted growth in home values.
For many, that’s a car payment and to save that takes both effort and time.
Some start with less, others with more, but for all, starting is usually the hardest part.
“It can be done; it’s easy if you just set it out,” Maria Holland, Realtor for RE/MAX Homes and Estates, Lipman Group said.
Chief Economist for CoreLogic, Dr. Frank Nothaft, notes 82 percent of consumers note housing affordability as a key problem as home prices reach record highs, with the year-over-year increase in prices reaching its highest level since 2005.
“The big hurdle is that boat load of cash you need upfront,” Dr. Nothaft said.
The problem is, that boat load of cash continues to grow. First-time buyers today need a year longer to save for a 20 percent down payment than they did five years ago, Zillow found.
“It would be one thing if your income, your wages, were rising 15 percent per year,” Dr. Nothaft said. “Well, they’re not, not by far and yet the amount of cash you need to save up front is 15 percent more this year than last year because of the [home] price increase.”
According to Zillow, starter homes are growing in value at almost seven times the monthly rate of renter income growth.
If we look at the math (keep in mind these are national medians, and there are huge variations from market to market), it would take the typical renter income of roughly $4,000 a month, saving at the typical renter rate of 2.4 percent about a quarter century to save for a 20 percent down payment on the typical U.S starter home, at around $150,000.
The problem in Nashville Holland says is starter homes are sitting around $340,000, not $150,000, so that means Nashvillians have to save even more!
“I think so many times we spend $200 on a good night out and do that several times a month,” Holland said. “Cut one or two of those out and all of the sudden you saved $400 in one month.”
For those who are able to do that and save around 10 percent of their income, Zillow estimates it would take 6.4 years to put down 20 percent on a home and a little less than a year to save up for a three percent down payment.
Holland recommends getting a conventional loan and putting down at least five percent.
“Then we get into these multiple offers, so it goes over what their 20 percent would be,” Holland said.
The great news for homebuyers, 20 percent down isn’t required. In fact, Zillow found a quarter of consumers are putting down five percent or less, and in today’s market, that’s perfectly fine because interest rates are so low.
“The buying power is huge because the interest rate today is about 2.875 percent. It’s historically low, like in the 1940s it was maybe 4 percent,” Holland said. “You go up a full percent in interest and it really changes your payment.”
Holland says saving, of course, is important but she’s urging prospective buyers to have at least three lines of credit and to try to pay down some student loan debt before applying for a home loan, as that can greatly impact your buying power.