Buying a First Home is Getting Harder: 8 Steps for a Successful Quest

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If buying a first home is on your wish list, it’s a good idea to start now to turn your wishes into action steps, even if homebuying still is a few years away.

Homeowning isn’t for everyone. Stretching to make a too-steep home payment has ended badly for many homeowners. Since the housing bust, the rate of homeownership has fallen to 63 percent, the lowest level since 1967 (it was 69 percent, a high, in 2004), according to CNBC. The reality is hitting home: Just 71 percent of Americans intend to own a home, down from 77 percent in 2010, according to a Harris poll conducted for Trulia, the online real estate market, in late 2015.

Renters hope to buy a home

Not to say that the dream of homeowning is dead. Not at all. Nearly 90 percent of renters ages 18 to 34 and 77 percent of those ages 35 to 54 told the Harris pollsters that they eventually want to own a home. But would-be buyers seem to have a more-realistic picture of what they’re facing: 72 percent of the youngest group said they don’t expect to buy until at least 2018.

If you are among those dreaming of a home of your own, you should understand that homeowning is no longer the slam dunk it used to be for entry-level buyers. You should start saving and planning long before you want to buy.

Here are several reasons why it’s getting harder to buy a first home:

1. Prices are rising

After years in doldrums, home prices have taken off. The cost of entry-level homes is rising, especially in the West. San Francisco and Denver have seen double-digit home-price increases between 2014 and 2015.

Take newly built homes: In September 2015 the median price paid (half paid more, half less) was $296,900, $35,400 more than a year earlier, the Federal Reserve Bank of St. Louis reports.

Nationally, prices rose 4.7 percent on all homes, new and used, between July 2014 and July 2015, according to the widely watched Case Shiller Home Price Index. This means first-time buyers must save bigger down payments and are getting less home for the money than a year ago.

Cheaper homes sought after by first-time buyers are in particularly high demand, Trulia’s chief economist Selma Hepp told The Wall Street Journal (subscription required).

2. The jobs are in expensive cities

If you are a younger trained or college-educated worker, the chances are you live and work in a city whose homes you can’t afford. According to The Associated Press:

College graduates and younger families have been clustering in coastal cities such as New York, San Francisco and Seattle, where incomes are generally ample and solid middle-class jobs plentiful. Yet studies and government data show that homes in these areas have become prohibitively expensive.

The cities and towns that do have affordable homes don’t often have jobs.

3. Rising rents make it hard to save a down payment

It’s hard to save for a down payment when your rent keeps going up. Zillow’s research finds that homeowners with a mortgage spend about 15.3 percent of their monthly income on housing bills and renters are spending nearly twice that, Bloomberg Business reports.

Those spending more than half of their income on rent grew by 61 percent between 2000 and 2013, from 7 million to 11.3 million, and the trend will keep growing, says an analysis by Enterprise Community Partners and the Harvard Joint Center for Housing Studies.

4. Wages are flat

When prices are rising but your income is stuck in neutral, how can you save for a down payment on a home purchase? The Economic Policy Institute calls flat wages the key barrier to getting ahead in the United States.

5. The supply’s just not there

In a lot of markets, entry-level buyers are in a ravenous competition for the few entry-level homes available. CNBC’s Diana Olick blames the lack of housing inventory on two things:

  • Small builders have trouble getting credit to build more homes.
  • Bigger builders have their sights focused on the affluent market, leaving buyers for lower-cost homes out in the cold. It could take some time for builders to straighten out this problem.

Meanwhile, entry-level prices rise in response to the competition.

How to position yourself for a good life

If you are hoping to buy a home, you need to be ready when opportunity knocks. If you’re not ready now, get ready. Housing is a changeable market. You’ll want to be able to move on a dime if the wind starts blowing in your direction — if you stumble onto a cheap home you love, for example, or if prices start dropping.

Use this checklist to prepare for buying a home — not now, but some day soon:

1. Consolidate and reduce debts

Good news: Student debt is not the barrier to homebuying that you might expect. After looking at research from TransUnion and Capital Economics, HousingWire reports that student debt is not stopping young buyers from getting mortgages. Student debt is a disadvantage for three to six years after school but student-loan consumers catch up with their peers after that point, the article says.

Here’s inspiration and help for eliminating consumer debt so you can take on a mortgage: “Is 2015 the Year to Tackle Your Debt? 10 Tips to Find Free or Low-cost Help.”

2. Consider a strategic move

After you’ve toiled for a few years in the big leagues in your field, it may make long-term sense to move where you can find good work and affordable housing. “Earning Minimum Wage? You Should Buy a Home Here” tells where minimum-wage workers have the best shot at home ownership. And, for earners at all levels, The Wall Street Journal lists cities with both, including sweet spots (high wages and lower housing costs) in Georgia, Michigan, Ohio, Texas, Missouri, Kentucky, Tennessee, Wisconsin, Indiana and South Carolina and other states.

3. Get your down payment

The big obstacle to homebuying for many is the necessity of amassing a down payment. You’ll find ideas, inspiration and information about getting your down payment together at “10 Ways to Come Up With the Down Payment for a Home.”

4. Talk with a nonprofit credit counselor

Having a free or cheap chat with an expert is a great way to find out where you really stand and what your next steps should be. These counselors can help with questions about housing, debt and consumer budgeting and finances. You don’t have to be in debt to get help. (Avoid debt-settlement companies whose solutions may make your problems worse.) Find free or low-cost counseling:

5. Think through the job ahead

6 Essential Steps to Buying the Right New Home” walks you through a list of things to think about when shopping for a home, from commute times to schools and proximity to medical services. The exercise can help you narrow down what you are looking for.

6. Polish your credit score — for free

Start burnishing your credit score. Once an expensive and difficult process, it’s now possible to see your credit score easily and for free from many credit card companies and banks, for example. Read “Hallelujah! 5 Ways to Get Your FICO Score for Free.” It’s satisfying to see your score improve as you pay off debts and prepare for applying for a home loan.

7. Get your credit ready for prime time

How to Get Your Free Credit Report in 6 Easy Steps” tells how to spot and fix any errors (not as uncommon as you might think) and ensure that your credit is ready to show to lenders.

8. Learn how to get a mortgage

Read “Homebuying 101: Getting a Mortgage That Saves You Thousands” to learn what it takes to get a home loan. “How Come You Still Can’t Get a Home Loan” explains some of the problems first-time buyers run into getting credit and how to prepare before applying.

Are you plunging into the housing market for the first time? Share your thoughts and experiences with us in comments below or on our Facebook page.