The American Dream of homeownership is rapidly slipping out of reach of more and more Americans. The homeownership rate fell lower yet again in Q2 to 65%, well down from its all-time high of 69.2% in 2004 at the height of the housing frenzy.
While the housing recovery has relieved many homeowners who were able to hold on to their properties throughout the recent crisis, there is little relief available to newcomers into the market. Everything seems to be stacked up against them.
What is causing this separation of those who can’t from those who can participate in the American Dream? What can those who are left out do to get a little piece of America attached to their name?
Good for Some
Homeowners all across America had taken a hit to their property values, lasting quite some time after the housing bubble burst in 2008. But those who were able to continue their mortgage payments have been rewarded for their patience, as home prices are once again on the rise.
Since June of 2012, home prices have risen every single month, with each new rise greater than the month before. The latest S&P/Case-Shiller home price index for May was 12.2% higher than a year prior. Home prices are now climbing as fast as they were back in March of 2006, some two years before they imploded.
Some cities are already at their peak bubble highs, such as Dallas and Denver. But on the whole, the national home price index comparing the 20 largest housing markets in the U.S. is still a safe 24.4% below the bubble’s peak of June 2006, indicating that home prices can climb so much higher still.
The latest spurt to home values has been driven by a last-minute buying spree prodded by rising mortgage rates, which jumped 1.16% in just two months, from 3.35% in May to 4.51% by mid July before dropping a little to the current 4.31%, according to Freddie Mac.
For the first time in a long time, it’s a seller’s market, with multiple bids per property driving prices higher and higher. If you have been thinking about scaling down to a smaller home or moving to a smaller town, you might be getting close to a good time in which to do it – not quite there yet, but getting closer.
Prices will likely continue rising for a few more quarters until the Federal Reserve normalizes interest rates, which could take another 3 or 4 years to complete. Once there, normal interest rates will slant home prices to a shallower climb.
Not So Good for Others
But while sellers may be having a roaring good time, buyers are finding it very challenging. Rising property prices and rising interest rates have knocked many potential buyers out of the market, as values are now beyond the credit limits available to them, and mortgage costs are beyond their budgets.
Mortgage qualifications are so much more stringent now than they were leading up to the bubble, hence the fall in the homeownership rate to 65%, with a further drop to the pre-bubble average of 64% expected within a year.
Those pushed out of homeownership are predominantly the younger ones. While senior homeownership remained relatively unchanged at 81%, given that the vast majority has no remaining mortgage payments, ownership among persons under 35 has fallen from 42% to 37% over the past 5 years. First-time buyers, historically averaging 40% of home purchases, make up just 29% of new buyers now.
It is unlikely, though, that rising home prices and rising mortgage rates will stop the housing recovery in its tracks. Over the past several quarters, the bottoming of prices has been attracting foreign buyers from Canada, Mexico, Europe, and China – Hong Kong in particular – among many other regions.
But these aren’t the traditional immigrant buyers many might expect. This new wave of buyers is made up of wealthy, retired or semi-retired, part-time residents who just want a second home in America. This incoming wealth is expected to keep the housing recovery strong for some time to come.
Everyone else – the American first-time home buyers, the young couples, and the young families – will need to start making some sacrifices if they are going to claim their piece of the American Dream.
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Fight for Your Piece of the Dream
Younger buyers are shut out of the housing market for two basic reasons, Sarah Rosen Wartell, president of the Urban Institute, identifies to Reuters: “thin credit files and limited assets for a down payment”.
So that’s our focus, then. If you are one of the many who have been shut out of the American Dream, you now have a two-part mission: improve your credit profile and build up a cash down payment.
First, build up a high credit score to prove to the banks that you are not a credit risk.
If you have credit cards, pay down their balances. Never, ever max out your cards to the point where you are continually running at maximum credit. It makes you look like someone who is up to their neck in hardship. Banks hate maxed-out cards.
Approach banks for a consolidation loan to move debt off your credit card onto a line of credit, which typically carries a cheaper interest rate. Not only does this improve your credit score, but the lower interest rate also allows you to pay down the debt faster.
Reducing the number of credit cards you own also improves your credit score. Banks don’t like the idea of fighting other institutions over your remaining assets should you default, or worse, go bankrupt. The fewer creditors you have, the better you will be received.
Second, save for a down payment. The more you have in cash when approaching a bank for a mortgage, the less risk the bank would be taking on. This means you can borrow less money and for a better rate, saving you a ton of interest over time.
To save for a down payment more easily, work out a budget and stick to it. You’d be surprised at how many expenses you can cut and still enjoy your life.
Cook for yourself instead of eating out. Not only do you save a ton of money, but you will generally eat healthier and maybe even eat less.
If your clothes still fit, keep wearing them. Do you really need a new pair of shoes every 6 months? No one knows how old your clothes are but you. And there’s nothing difficult about learning how to sew. A $10 sewing kit can save you hundreds of dollars a year.
When you do go shopping, there’s nothing wrong with the discount stores. Only you know how much you paid for your clothes. You’d be surprised how many things actually look good on you, regardless of how little you paid for them.
And you can look just as good grooming yourself at home as at a salon. Remember that it isn’t so much that looking good makes you smile. It’s smiling that makes you look good.
Rent a cheaper place. Who cares if it’s next door to a fire station. You’ll be buying a new house soon.
Live with family for a while if possible. Just two years’ worth of rent could contribute some $20,000 to your down payment all by itself.
Any small sacrifice made now will benefit you immensely when you can finally buy your own home with a higher credit rating, a larger down payment, a smaller mortgage, and lower interest payments. It’s better to rough it now for a short time than to rough it later for longer.
Remember that you have just as much a right to the American Dream of homeownership as anyone else, regardless of your age, gender, color, ethnicity, or occupation. So roll up your sleeves, tighten that belt, and count those pennies. Fight for your dream to own a little piece of your country.
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