1st Time Homebuyers Face Enormous Challenges—Here’s How to Cope

A home for sale in San Anselmo, Calif., on March 22, 2023. (Justin Sullivan/Getty Images)

Commentary

A recent confluence of news headlines caused me to consider the plight of first-time homebuyers.

While mortgage interest rates have declined somewhat, and so have average home prices, home affordability was nevertheless at its lowest in 40 years in 2023.

Zillow reports that the one-two punch of interest rates and home prices has, on average, caused the minimum income to comfortably afford a new home to soar some 80 percent, to $106,000, since 2020. This impedes a number of first-time homebuyers, which, in turn, negatively affects family formation, birthrates, and population, a key factor in both the economy and national security.

A less noticeable aspect of soaring home prices is that a number of private equity funds and real estate investment trusts (REITs) have stepped into the market as investment vehicles, boosting prices. Social media cite a number of examples, including at least one that I cannot verify, where a prospective buyer of a home was outbid by a private equity firm that then turned around and offered to rent it to the buyer who had been outbid!

Against all these challenges, it’s important to ensure that first-time homebuyers are equipped to meet them as much as possible.

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Here are some tips:

Benefits

Check for potential benefits your state, city, company, or union may offer first-time homebuyers. If you’re a veteran, you have access to mortgage loans that are usually better than those of us who have never served. Check with your local industrial development agency, company, union, or even local banks to see if you might qualify for additional benefits.

Clean Up Your Credit Rating

If you need to delay your purchase for a year or two to raise your credit rating, it’s worth the while over time. Pay off credit card balances you may be carrying (a debt you should swear off forever and never repeat), cut up store credit cards, and promptly pay your bills.

You’re entitled to a free copy of your credit report, so you can challenge any negative reporting, even if it may have been true at the time. Lenders simply want to know that you have outgrown the practice of many young people who live beyond their means and finance the difference with a Visa card.

Get Preapproved for a Mortgage

A preapproved mortgage, usually up to a certain amount, is like shopping with cash. It will motivate the seller to deal more seriously with you for an expeditious closing than a competing buyer whose mortgage must be approved.

Negotiate, Negotiate, Negotiate

Most buyers will have a set price threshold under which they will not go or, at least, think they won’t. As the buyer, your job is to disabuse them of the notion that’s the “minimum” they will accept.

But as you view the home you’re buying, don’t be shy about pointing out shortcomings that you can use later to negotiate a lower sales price. Casually mention to the seller or the agent: “I see the (kitchen, bathroom, cabinets, flooring, window frames, etc.) are old. Are you replacing any of that, or are you leaving it to the eventual buyer to replace?”

Don’t be shy, but don’t be obnoxious, although it may benefit you to come close.

Go for the Shortest Term Mortgage

Most advisers will emphasize the power of leverage. “You should use your leverage on a 30-year mortgage to buy as much home as you can afford because you get to deduct the interest, make a lower interest payment, and invest more in equities,” the advice usually goes.

While those advisers are right on the math of mortgages, I’m a contrarian on this aspect of home-buying because the 30-year mortgage creates a greater risk to one’s personal balance sheet. Your home provides personal utility by being a place to rest your head and a means to accrete wealth.

The risk of a job loss, a divorce, the death or disability of you or your spouse, personal bankruptcy, or the financial dependency of an elderly parent—and thus a mortgage default—all increase over time.

It’s better to pay a bit more each month for a smaller house than to pay less and exacerbate risk. Keep in mind, too, that with stronger equity buildup on the 15-year mortgage, you may be able to afford a bigger house by selling the one you have and applying more of the sales price to the larger home.

Buy in a ‘Transitional’ Neighborhood—Then Make It Better

Every neighborhood has risk, largely the political risk from the operation of local government. Low crime, affordable taxes, and good schools all enhance property value. In many locations, particularly cities, “transitional neighborhoods” can improve because they make the area more valuable to your home, or they can worsen and diminish the value.

But if a critical mass of buyers buys in a transitional area, they can have a tremendous effect on home values by making the area better through civic engagement: voting, registering likeminded neighbors, creating a neighborhood association, running for the local school board, or even the city or town council.

Follow local developments closely in any event, as they affect your investment. People who bought co-ops or condos in Manhattan on the cusp of Rudy Giuliani’s mayoralty—shortly after the disastrous reign of Mayor David Dinkins when New York City suffered a high of 2,600 murders—saw enormous gains in property value.

Revelers celebrate New Year's in Times Square in New York on Jan. 1, 2024. (Adam Gray/Getty Images)

Times Square, for example, went from a gritty, dirty, crime-ridden adult entertainment sewer populated by 3-Card Monte dealers, pickpockets, and prostitutes to a prime real estate tourist destination, with “The Lion King,” Madame Tussauds Wax Museum, hotels, and an array of higher-end casual dining chain restaurants.

That kind of investment and development was repeated in various other run-down city neighborhoods, from the once-dangerous East Village, East Harlem, and “Hell’s Kitchen” neighborhoods in Manhattan to the Barclays Center in Brooklyn, Ferry Hawks Stadium in Staten Island, the new Yankee Stadium in The Bronx, and numerous locations in Queens.

Never Forego the Pre-closing Walk Through!

Usually, on the morning of the closing or the day before, ask the seller or his agent to do a “walk through” of the property you’re purchasing. Flush the toilets; make sure the faucets run (and that they drain); make sure the appliances are in good working order; open and close the windows; ensure the doors open and fully close and that all the knobs work. Check the basement and give a good walk over the yard to ensure there are no sinkholes, septic tanks, etc. If you find shortcomings, you can address them at the closing by a reduction in the purchase price.

Change the Locks on Your New Home as Soon as You Take Possession

You have no idea to whom the prior owner has given keys or who has access to your security cameras, if any. It is best to have a whole new security arrangement for your security.

Owning a home is the first step of the American dream. For most people, it will be the single biggest contributor to their net worth. It will also be a place where you raise your children, celebrate the holidays, and commemorate events—creating fond memories as you grow older. Cherish it. Maintain it. But most of all, enjoy it.

You worked for it.