Freedom to Move or $15K – $41,K

Continuing my effort to help guide Gen X and Y to home ownership let me get to the hard truth. It doesn’t matter what HGTV says, if you are under 30 you don’t deserve granite counter tops and you can’t have it all. Besides, if you have it all at 30 what is there to shoot for?

You may get 7 out of 10 things you want. That’s all. When you are over 40 you get 8 of the 10 things you want. I don’t think you ever get 10 of 10. You may be the exception – one who can afford a home with granite counters and good for you – but on average I’d focus on getting the asset – the home – and making improvements over time creating value. Lock in the low- interest rate while home prices are affordable.

It’s better to secure your home when rates are low (4.5% is low) and pricing good than to save for your dream home. If the dream home is 5 years, away we don’t know what the interest rates or home prices will be. Now back to the real issues for Gen X and Y – student debt and stagnant income.

Student debt:

You incurred debt. You invested in yourself. Good for you. Should you have incurred the debt? Who knows but it has been incurred. Grab your “internal locus of control” (previous August E-Note) and deal with what is.

For sake of discussion, let’s say your student debt is $400 per month. Maybe you have a car loan at $200 a month. The total, $600, affects your income-to-debt ratio and will determine the amount of mortgage you qualify for.

If you earn $48,000 a year, a lender will allow approximately $1,400 per month to be spent on housing (principal, interest, taxes, insurance). That translates into a mortgage of roughly $175,000.

The $175,000 home may not have everything you want (see opening paragraph), but it will be a good home with the potential to build equity. (We’ve recently had a number of Gen X and Y clients accomplish this goal in a range from $140,000 to $340,000.) Oh, and the $1,400 per month ($1,250 after tax deduction) is less than what many spend on rent. With a down payment of $7,000-$10,000, it is a start. A start is important.
In 5 years without appreciation, you have roughly $15,000 in equity. In 5 years with 3% appreciation (the historic level) you have $41,000 in equity. With rent you have neither but you do have the freedom to move whenever you want. Choices.

Stagnant income:

Gen Y and X are suffering income stagnation. Four years after the recession, a study from Sentier Research finds that median household income is still down 4.4%. Locking in housing costs and creating equity is not a substitute for income increases, but it does lock in a cost and provide the opportunity to build equity.

I know Gen X and Y struggle with their history of housing – they have only known bad times. I knew bad times in the stock market a few years ago. If I recall, the Dow went to 6,800. I stayed in because history told me to. As of this writing it is 14,833. To suggest the risk of home ownership outweighs the reward simply does not resonate with me.

Most people are paralyzed by a fear of failure and as a result rarely take any action. Take some action. Ask housing questions. Question the answers and then, as you are comfortable, move forward – one of the benefits of coffee with Homebuyer Associates.