The decision to buy a home versus renting is one of the biggest financial commitments that many adults will make. Paying rent every month is far more simple than figuring the true costs and benefits of home ownership, and this makes it more difficult to compare the two options. At the same time, if you are a renter, every time you send in the rent check, you may wonder if a mortgage payment might be lower and owning a home more beneficial.
However, the continuing increases in home prices and lack of supply have contributed to a reticence among renters about diving into home ownership. This was confirmed by a recent survey conducted by the National Association of Realtors (NAR). The Housing Opportunities and Market Experience (HOME) survey found that renters often hold misconceptions about down payments that cause them to forgo purchasing a home.
As autumn approaches, the percentage of renters who believe that now is a good time to purchase a home has crept downward since the early part of 2016. 60 percent of renters versus 62 percent in the two previous periods agreed that now is a good time to buy. In December 2015, 68 percent of renters agreed.
Lawrence Yun, chief economist at NAR, said, “Very affordable mortgage rates and strong job gains among young adults should be translating to a higher rate of homeownership. It’s not, and as a result, sales to first-time buyers remain stuck below a third of all sales.”
Why the Hesitation?
Misconceptions about down payments seem to be adding to this reticence to acquire a home. The survey also found that awareness about low-down payment mortgages was lacking across every age, education level and income bracket. Fewer than 20 percent of respondents knew it is possible to finance a home purchase with a down payment of 10 percent or less.
It is possible that the uncertainty surrounding the housing market is due to this lack of education about mortgage financing options that do not require a 20 percent down payment. In some areas of the country, particularly the west, a 20 percent down payment could translate into $100,000 or more, which is generally out of reach for first-time home buyers. NAR has found that first-time home buyers put down 5 percent on average.
Credit worthy prospective buyers have options with secure, sustainable loans for as little as 3 percent down, and taking on a mortgage is easier now than it was in the aftermath of the Great Recession. Each buyer has a unique situation, and a review with a Realtor can help you determine if your financial circumstances can support purchasing an affordable home.
California Housing Affordability
This is particularly true for California households. A recent California Association of Realtors report on housing affordability noted that for the first time, the minimum annual income to pay a monthly mortgage of $2,530 was $101,217 (30-year fixed-rate mortgage of 3.85 percent). Thirty-one percent of California households could afford the median price for a single family home of $516,220, while forty percent could afford the median priced condo or townhome at $411,390.
Those sound like daunting numbers, but still you need to consider the tax benefits and potential for capital growth and building equity in order to gain a more accurate perspective on home buying. Renting may work for a while, but buying a home still has longer term benefits that far exceed any that renting can offer.