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Think You Need to Save 20% for a Down Payment? Think Again

Saving for a down payment often represents the biggest hurdle for first-time home buyers. In December, 25% of buyers on realtor.com® who were looking to purchase their first home said a key factor holding them back was lacking funds for a down payment. No matter how you cut it, it represents a big chunk of cash. But here’s the thing: It doesn’t always need to be quite so big as most think.

Many first-time buyers don’t realize that it doesn’t necessarily take 20% down to purchase a home.

Indeed, the average down payment in the U.S. on mortgages used to purchase a home was 11%, according to our analysis of loan records from Optimal Blue, an enterprise lending software company.

As with many stats, that 11% average hides lots of variation across loan types and locations. And for some buyers, it may even take more than 20% to buy a home.

Borrowers with jumbo mortgages had to put the highest percentage down, with an average of 23%. Conforming mortgages averaged 18% in 2016. On the other hand, government-backed FHA, VA, and USDA mortgages featured average down payments of 4.8%, 2.2%, and 0.4%, respectively. These government programs are meant to open up more pathways to homeownership for first-time buyers, veterans, and heads of households in rural areas.

Where you live or are thinking of living can also dramatically affect what it takes to get a mortgage. Higher-cost markets don’t just have higher-priced homes; they also have buyers with higher down payments. Lower-cost markets are just the opposite.

Higher-cost markets tend to have higher down-payment percentages because those more expensive homes are less likely to be covered by low down-payment loans.

Cutting to the chase: Without a higher down payment, the monthly payment simply ends up being too high to afford in an expensive market. Got that? This is why borrowers in high-cost areas have little choice but to put a higher percentage down on top of paying a much higher price.

That’s why, regardless of income levels, it’s so much harder for first-time buyers in high-cost areas.  And homeownership rates, especially for younger households, take a hit.

Deciphering the financial differences

Let’s dive into some specifics so that it is easier to understand the financial differences.

The average purchase price of homes financed with a mortgage was just over $290,000 in 2016 across the U.S. The average down payment amount was $32,680, or 11%.

But in the District of Columbia, where the average purchase price was just over $630,000, the average down payment was almost $110,000, or more than 17%.

That $110,000 could fund more than two-thirds of the average purchase price of $165,000 in Mississippi. And in that low-cost state, the average down payment was under $9,000, or a little more than 5%.

The variances get more extreme as we get more local.

Buyers in San Francisco County put down an average of more than $326,000 on homes purchased in 2016, which represented an average down payment of 29.9%.

In Manhattan, buyers shelled out an average down payment of (gulp) 30.2%, but because the average purchase price was slightly less than San Francisco, the dollar amount of the down payment was a more modest $219,000.

In more rural counties in the South and Midwest, average down payments can be closer to 3% and often amount to $5,000 or less. For example, in Tennessee’s Tipton County, an outer suburban county of Memphis, the average down payment was just over $3,500. The average price of a home purchased with a mortgage in 2016 was just under $138,000.

In Tipton, more than 80% of the mortgages were FHA, VA, or USDA.

So the whole etched-in-stone notion of 20% down payment or bust? Well, it all depends on how you look at it. And where.


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A Tale of Two Markets: Inventory Mismatch Paints a More Detailed Picture

A Tale of Two Markets: Inventory Mismatch Paints a More Detailed Picture | Keeping Current Matters

The inventory of existing homes for sale in today’s market was recently reported to be at a 3.6-month supply according to the National Association of Realtors latest Existing Home Sales Report. Inventory is now 7.1% lower than this time last year, marking the 20th consecutive month of year-over-year drops.

Historically, inventory must reach a 6-month supply for a normal market where home prices appreciate with inflation. Anything less than a 6-month supply is a sellers’ market, where the demand for houses outpaces supply and prices go up.

As you can see from the chart below, the United States has been in a sellers’ market since August 2012, but last month’s numbers reached a new low.

A Tale of Two Markets: Inventory Mismatch Paints a More Detailed Picture | Keeping Current Matters

Recently Trulia revealed that not only is there a shortage of homes on the market in general, but the homes that are available for sale are not meeting the needs of the buyers that are searching.

Homes are generally bucketed into three groups by price range: starter, trade-up, and premium.

Trulia’s market mismatch score measures the search interest of buyers against the category of homes that are available on the market. For example: “if 60% of buyers are searching for starter homes but only 40% of listings are starter homes, [the] market mismatch score for starter homes would be 20.”

The results of their latest analysis are detailed in the chart below.

A Tale of Two Markets: Inventory Mismatch Paints a More Detailed Picture | Keeping Current Matters

Nationally, buyers are searching for starter and trade-up homes and are coming up short with the listings available, leading to a highly competitive seller’s market in these categories. Ninety-two of the top 100 metros have a shortage in trade-up inventory.

Premium homebuyers have the best chance of less competition and a surplus of listings in their price range with an 11-point surplus, leading to more of a buyer’s market.

“It leaves Americans who are in the market for a home increasingly chasing too fewer options in lower price ranges, and sellers of premium homes more likely to be left waiting longer for a buyer.”

 Lawrence Yun, NAR’s Chief Economist doesn’t see an end to this coming any time soon: 

“Competition is likely to heat up even more heading into the spring for house hunters looking for homes in the lower- and mid-market price range.”

Bottom Line

Real estate is local. If you are thinking about buying OR selling this spring, sit with a local real estate professional who can share with you the exact market conditions in your area.


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The Misleading Math Behind the Rent vs. Buy Calculation

There’s about $13.1 trillion stashed away in the United States, in plain sight. Where? In our homes!

Do we have your attention yet?

That’s the total value of the equity held by over 75 million U.S. homeowners, according to the latest estimates from the Federal Reserve Board. And that works out to almost $175,000 per owning household.

This is unmistakable evidence that homeownership is a critical building block of household wealth. Owning a home is a key reason why the median net worth of a homeowner is almost $200,000 while the median net worth of a renting household is just over $5,000.

Sure, part of that is because owners were able to pony up a chunk of money to put down on a house, and to qualify for a mortgage. But the act of paying for a mortgage actually helps produce more wealth, by freezing payment amounts and building equity through forced savings.

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A 30-year amortized, fixed-rate mortgage is a beautiful thing. It provides an affordable path to buying a home while locking in today’s cost of that home for the life of the loan.

The traditional rent versus buy argument compares the total monthly costs of buying a home with a mortgage with the corresponding rent. So that comparison is relevant when it comes to representing  the housing choice trade-off in clear cost terms.

Two years ago, that head-to-head heavily favored buying, thanks to very low mortgage rates and lower prices. Back then, more than three-quarters of the counties in the country saw lower buying costs than renting costs.

With prices and rates higher now, less than half of the counties in the country see math that favors buying.

But those raw numbers hide the fact that unlike a rent check, a percentage of every monthly mortgage payment—after the lender is paid interest—goes toward the owner’s home equity. That means it’s really a forced savings plan.

Over time, less of the mortgage payments go toward interest and more go toward equity, so the savings power is enhanced further.

Here’s how that works out for a median-price home of $250,000 bought in January with 20% down with a monthly payment of $976.

Before their first payment, the proud new homeowners had $50,000 in equity thanks to their down payment. (Actually, 20% down isn’t always typical or necessary, but, hey, it keeps this illustration simple.)

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In the first year, an average of 29% of the monthly payments builds equity. After 12 payments, the homeowners have just over $3,400 in added equity.

By year 14, 50% of the monthly $976 payment goes toward equity. Don’t forget that the monthly payment hasn’t changed, because the interest rate was fixed.

At the end of the 14th year, just shy of $64,000 has been added to the initial $50,000 in equity.

In the final year of the 30-year mortgage, while the monthly payment remains $976, 98% of the monthly payments builds equity until that magic day when the home is owned free and clear.

Think you can beat that with rents? Researchers at Harvard put it this way:

“While studies simulating the financial returns to owning and renting find that renting is often more likely to be beneficial, in practice renters rarely accumulate any wealth. In no small part this seems traceable to the difficulties households face in trying to save absent either a clear goal or an automatic savings mechanism.”

So, you want a better rent versus buy illustration? First, find a place to rent for no more than $976—the same as our mortgage payment example above. If you can rent for less, great. Will you be able to save that difference amounting to at least $3,400 in the first year? That would imply you can really pay only about $700 in rent to get the same savings effect.

If you can’t save $3,400 yourself by paying less in rent, ask the landlord if he’ll take a portion of your rent payments and set it aside for your rainy day fund.

Then ask the landlord if he’ll set your rent payment at today’s rate for the next 30 years. And before you close the deal, ask him to raise the rainy day share each year by 1% to 2% until year 30, when he’ll get only 2% of the rent payment.

Clearly, this would not be easy to do.

Even if the house only keeps pace with inflation over 30 years, which is a very conservative assumption, the forced savings inherent in a mortgage guarantees a homeowner is building wealth. A renter household has to be extremely diligent to amass the same savings that the good ol’ 30-year mortgage does automatically.


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Do You Know the Real Cost of Renting vs. Buying? [INFOGRAPHIC]

rent-vs-buy-kcm

Some Highlights:

  • Historically, the choice between renting or buying a home has been a close decision.
  • Looking at the percentage of income needed to rent a median-priced home today (30%), vs. the percentage needed to buy a median-priced home (15%), the choice becomes obvious.
  • Every market is different. Before you renew your lease again, find out if you could use your housing costs to own a home of your own!

Overall and practicality wise, owning a home is so much better than renting out. If ever you have decided in buying your own home this year, feel free to email me. Let me help you find the perfect home for you!


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Buyer Demand Is Outpacing the Supply of Homes for Sale

The price of any item is determined by the supply of that item, as well as the market demand. The National Association of REALTORS (NAR) surveys “over 50,000 real estate practitioners about their expectations for home sales, prices and market conditions” for their monthly REALTORS Confidence Index.

Their latest edition sheds some light on the relationship between Seller Traffic (supply) and Buyer Traffic (demand).

Buyer Demand

The map below was created after asking the question: “How would you rate buyer traffic in your area?”

Buyer Demand Is Outpacing the Supply of Homes for Sale | Keeping Current Matters

The darker the blue, the stronger the demand for homes in that area. Only six states had a weak demand level.

Seller Supply

The Index also asked: “How would you rate seller traffic in your area?”

As you can see from the map below, the majority of the country has weak Seller Traffic, meaning there are far fewer homes on the market than what is needed to satisfy the buyers who are out looking for their dream homes.

Buyer Demand Is Outpacing the Supply of Homes for Sale | Keeping Current Matters

Bottom Line

Looking at the maps above, it is not hard to see why prices are appreciating in many areas of the country. Until the supply of homes for sale starts to meet the buyer demand, prices will continue to increase. If you are debating listing your home for sale, shoot me an email and let me help you meet buyer demands by listing your home today.


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Tips for Renovating a Home to Appeal to Baby-Boomer Buyers

Follow these tips from HGTV’s Christina El Moussa to catch the savvy baby-boomer eye.

On average, the American population is getting older. More than 76 million Americans were born between 1946 and 1964 (the baby-boom generation), which means a large portion of our population is aged 50 and older. Baby boomers are either retired or reaching retirement age, and they are quickly becoming empty nesters.

These aging Americans are looking to downsize because they no longer want or need their five-bedroom, two-level homes. A home that better fits their current lifestyle is much more appealing, especially if it means they don’t have to make the move to a retirement home.

When Tarek and I are flipping a house in a neighborhood that attracts baby boomers (a less expensive neighborhood with smaller homes), we make sure to include features that appeal to this generation. An easy-access shower or a main-floor bedroom may be some of the features that first come to mind, but baby boomers have other preferences and needs that make a future home more appealing.

If you’re flipping a home that could attract baby boomers, you’ll want to keep these tips in mind as you renovate.

Luxury features

While baby boomers may be looking to downsize in square footage, they’re looking to upsize the luxury in everything else. Budget-friendly remodeling tricks (such as painting the kitchen cabinets) might work just fine for younger homeowners, but chances are baby boomers will be a little more choosy. After all, they’ll most likely be living in this home for the rest of their lives.

You can’t go wrong with installing luxury features like wood floors, granite countertops, and stainless steel appliances. These features are sure to bring potential baby-boomer buyers to your flip.

Courtesy of Zillow Digs.

More convenience

Baby boomers are tired of living in an old home that requires maintenance and work. Instead, they want something new that provides more convenience and less stress.

Boomers love modern appliances that they won’t have to repair, a yard that’s easy to maintain, energy-efficient windows and doors to save on their heating bills, and a large, open floor plan that provides lots of space and natural light.

Additionally, baby boomers prefer a one-story home because they won’t have to go up or down stairs to get to their bedroom.

Courtesy of Zillow Digs.

Home office

Many baby boomers are still in the transition phase from working a full-time job to retiring. Often boomers want to keep working even after they’ve retired because they enjoy bringing in the extra income. A home office will allow them to work from home without having to commute every day.

While you don’t necessarily have to spend a lot of money on transforming a room into an office, setting aside a room to be used specifically as a den or an office will be appealing to those baby boomers who want to continue working.

Courtesy of Zillow Digs.

Easy-to-maintain yards

This goes hand-in-hand with more convenience, but I can’t seem to stress it enough. Put simply, baby boomers want a yard that doesn’t need a lot of work.

While finding a zero-maintenance yard is not very likely (except, of course, in maintenance-free communities), hardscaping a portion of the yard or replacing the lawn with a patio will cut down on yard work.

Courtesy of Zillow Digs.

Extra space

Baby boomers love extra space — but it has to be flexible space. They enjoy space they can adjust to their lifestyle and preferences. Rooms they can easily transform from a guest room into an office and then a hobby room are much more attractive than a space meant to be a bedroom forever.

Boomers like the freedom to choose how they use their extra space, especially when it doesn’t require a lot of work on their part to make the changes.

Courtesy of Zillow Digs.

Baby boomers require unique features in their homes, which can be overwhelming if you’re not sure how to appeal to their generation. But keep these tips in mind during your next flip and you’re sure to attract baby boomers.

If you are serious in selling your home this year, you have to follow these tips to attract the biggest buyers of the market. When you’re ready and your home is set, give me a call and let’s get your home listed!


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Got Savings? How To Build A Down Payment For A Home In 1 Year, 3 Years, Or 5 Years

Thinking about buying a home in the near future? Whether it’s a home for sale in Kihei or Wailuku, you’ll need a solid savings fund to accomplish this goal. In addition to covering such expenses as closing costs, escrow, and initial payments on taxes and insurance, cash is necessary for a down payment on your mortgage.

Planning to have 20% of a home’s purchase price to use as your down payment is a smart move. It not only makes you a more attractive borrower to a lender, but it also makes you a more reliable buyer. The more money you put down, the less likely your financing (and your home purchase!) will fall through.

A 20% down payment is a great savings goal, but it’s also a lot of cash. Let’s say you want to buy a home that costs $250,000. You’ll need $50,000 in cash to put down. That’s no small number. But you can make it happen in the near future. Here’s how you can work to build a down payment in one year, three years, or five years.
build-down-payment-1-3-5-years-010217-hero

Raise a down payment in one year

If you target this goal, know upfront that you’ve given yourself a serious challenge. Building a savings fund of $50,000 in 12 months will require you to set aside $4,167 per month and take some extreme measures to make it happen. First, look at every single dollar you can cut from your current spending. Here are a few ways to aggressively trim your expenses.

Move in with a friend or family member to slash your rent. In addition, you could offer to do work around the house or help out in other ways to cut your rent further (or even live rent-free!).

Sell useful but not strictly necessary assets, like your car. You can also comb through all your possessions to determine what you could sell, from old collections to used textbooks to clothes and more. Consider consignment stores, online yard sales, and other ways to sell your stuff.

Get rid of every nonessential expense, no matter how inexpensive it may feel. That can include everything from services like Spotify and Netflix to discretionary spending like shopping or new tech.

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Downgrade essential services for cheaper options. Perhaps you can reduce your insurance coverage and drop the cost of your monthly premiums. Other places to consider: your cellphone plan and your groceries. Your new rule should be “If I don’t need to buy it, I won’t.” Remember, you need to bank $4,167 every month. Many people’s total monthly budgets don’t add up to the amount you’re trying to save!

Save for a down payment in three years

While it’s still an ambitious savings goal (you’ll need to save $1,389 per month), your approach won’t need to be quite as extreme. However, the basic steps remain the same: Cut unnecessary costs and look to increase your income so you have more cash to save. Here are a few ideas to help you eliminate expenses and immediately save hundreds per month.

Switch to a streaming service. The average cable bill costs about $100 per month. Most streaming services are less than $10 per month. This will give you a monthly savings of $90!

Reduce the number of meals out you buy each week. If a daily lunch costs you $10 but packing your own costs only $4, that adds up to a monthly savings of $180.

Eliminate expensive entertainment. Even one date night to the movies per month can put a dent in your efforts! Two tickets, sodas, and a large popcorn typically cost about $35. In comparison, a rental from a video kiosk (or your streaming service) that you can enjoy at home with microwave popcorn? Maybe $5.

down-payment

Cut back on your vices. Beer, wine, and cigarettes don’t come cheap. If you’re used to buying a bottle of wine and a six-pack at the store each week, you may be spending close to $65 per month on alcohol alone. Cut back to just once a month (try the no-spend weekend!), and you could be looking at a monthly savings of $45.

Work out at home. There are countless alternatives to a pricey gym membership, from fitness communities to printable workouts to YouTube videos and more. You can slim down both your body and your budget for a monthly savings of $60 per month.

Negotiate your bills. Call your service providers, insurance companies, and cellphone carriers and ask about lower-cost options. You can switch to a more basic service, request discounts, or consider cutting the service altogether. This can add up to a monthly savings of $50 or more!

Making the changes in this list could save you $455 per month, which means you’re down to finding about $1,000 in your cash flow to allocate to your down payment goal. Additional sacrifices could include cutting dinners out to only twice a month. It might mean walking or taking public transportation instead of grabbing an Uber. And it may mean simply not buying things you don’t actually need.

Giving yourself three years also lets you make sustainable and lasting strides with earning more. You can develop a side hustle and turn that into a strong income stream. Or you could work your way up at your current position to take on more responsibilities that come with higher pay.

Every time you earn a raise, get a bonus, or make extra income, contribute it straight to your savings fund for your $50,000 down payment. That will either allow you to reach your goal sooner or require you to cut back less in spending.

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Build your down payment in five years

This timeline gives you the most flexibility in saving your $50,000 down payment. You’ll need to save about $834 per month to meet this goal. It’s still a lot of money but completely doable if you’re willing to cut back in places you currently spend. Use the tips above to help you cut costs and free up more cash for your down payment.

You might also consider investing your down payment savings in a taxable brokerage account. With five years until you need the money, placing it in the market enables your money to work harder for you. But remember, all investments carry risk. Don’t take this approach if you’re uncomfortable with the fact that you may end up earning 5% or more — but you could also only break even or even lose money.

The biggest challenge in saving $834 per month for this length of time is staying focused. To help, create an automatic transfer from your checking to your savings each month so you know that money consistently moves to your down payment fund even if your attention sometimes wanders to other, nearer-term issues.

And of course, working on earning more during this time will help too. Just as you would if you shot for the three-year goal, you can work to make lasting, big-impact changes to your earnings. If you’re entrepreneurial, that might mean starting something on the side and slowly growing that to a full-time business that generates more revenue than your current gig. The possibilities are endless, and with five years, you have much more time to test different paths and figure out what works best for you.

When you have successfully saved up for your down payment, call me and let us get your dream home ready!