To rent or to buy? That is the question.
A new Zillow analysis finds the minimum education needed to afford a mortgage payment is a high school diploma. For most, that translates to a median income of around $49,000.
But as Nashville continues to grow, many potential buyers are stuck renting.
The problem is rent in the city is getting too high for those making this median income ($49,000), and while monthly mortgage payments are within reach for many, down payments are a challenge to afford as prices have grown faster than incomes over the past several years.
“The size of that down payment is incredibly prohibitive for many if not most,” Skylar Olsen said the Director of Economic Research at Zillow. “Getting across that threshold is the hardest part it’s not affording it once you’re in because of low interest rates.”
Data shows home buyers need about seven years to save for a 20% down payment, one and a half years longer than it was in 1988.
When it comes down to it, Olsen says affording a home in Nashville is cheaper than renting, but only if you have the cash for a down payment.
“If we’re just talking rent vs. your mortgage because interest rates are historically low that mortgage payment on the monthly basis is pretty darn affordable compared to rent,” Olsen said.
Keep in mind the 30% rule of thumb — which recommends that you should never pay more than 30% of your income on housing.
In Nashville, the median home is worth $254,700. The typical mortgage payment is $1,010 accounting for 18% of the median household income. The median monthly rent is $1,528, requiring the typical household to spend 27% of their income on rent.
However, Olsen says, in downtown Nashville, people are likely paying more than that.
“What’s available are the new apartments in the more expensive apartment buildings…much more expensive than 27%,” she said. “The housing crisis, pre-bubble in Nashville, you were looking at 21%. The fact it’s increased to 27% means anyone whos been in Nashville for a long time — they’re looking around thinking this place is getting much more expensive fairly quickly.”
She says it’s forced those renting to find roommates or a smaller space.
“Everyone has a different kind of strategy everyone is going to make different tradeoffs. The lower income you are, the more tradeoffs you’re making,” Olsen said.
So if you can afford a down payment, buying a home is probably a better option in Nashville than renting a downtown apartment. Of course, the larger the down payment, the smaller the monthly payment.
“With many first-time buyers struggling to save for a down payment amidst all their other expenses, how much you should save quickly turns into how much can you save, what kind of assistance you have access to, and what your timeline is,” Olsen said. “Half of first-time buyers turn to family and friends for a gift or loan. Those that can rely on their networks build up a fifth of their down payment that way on average. Others are eligible for down payment assistance. Given your creditworthiness, you could potentially still get a great interest rate with a down payment of only 3.5-10%. All of that is personal, so start exploring your options early and make a plan.”
News 2 is reporting on Nashville’s historic growth and the growing pains that come with it. Click here for more Nashville 2019 reports.