Buying an existing home or building a new one is one of life’s big decisions, primarily because of the amount of money required to participate in the process. Both sides of the purchase transaction — the builder/seller and the buyer — struggle with the cyclical nature of mortgage interest rates and the supply and demand of available homes.
There is little doubt, however, that young families, especially those who are recently married, are highly motivated to become homeowners. A recent Reuter’s article points to the fact that "Among couples who have created a wedding registry in the last two years, a stunning 85% said they would have preferred cash toward a down payment on a home, instead of typical registry gifts.
“The trend is a simple reflection of the nation's housing market: Prices have risen so much in recent years that more than 75% of homes on the market are unaffordable for middle-class buyers," the news service said.
Understanding the factors that impact the buying and selling of homes is critical to navigating this often indecipherable maze. This is when a residential real estate expert can be invaluable.
Stephanie Smith is the director of social media for Acme Brick, and she is also a licensed REALTOR®. This allows her to have one foot in the construction industry (with Acme) and the other in the real estate industry, giving her a perspective that is highly informed on the challenges of building and buying a home.
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Home Buyer Challenges
A recent Axios news story reported on the length of time it takes an average buyer to save enough money for a down payment and closing costs for a new home. Using Zillow data for the supercharged Austin, Texas market, the news service pointed to an average of 10.5 years for a buyer to save 10% for a down payment in this metro area.
According to Zillow economists, “Affordability could be a major driver of cross-country moves as buyers seek a lifestyle within their means. In the Austin metro area, the average monthly payment burden for new homeowners who paid a 10% down payment is 44.8% of income. This includes mortgage payments, property taxes, and homeowners' insurance.
However, there may be more nuance to this data, according to Stephanie Smith.
“This may ring true for the Austin market, as it’s one of the most expensive places in Texas to purchase a home,” she said. “The time it takes to save for a down payment truly depends on the market. However, the average down payment for first-time buyers is between 6 and 7%. For repeat buyers, it’s around 17%, according to the National Association of REALTORS® (NAR).
“Higher mortgage rates have increased homeowner debt levels over the last two years. However, it isn’t stopping buyers from purchasing homes. Buyers who are determined to purchase are taking advantage of any seller concessions, lender credits, and down payment assistance programs available to them. They are also buying down their interest rates to decrease their monthly mortgage obligations. Data shows that new buyers are entering the market every day as mortgage rates stabilize.
“Overall, the housing market in Texas is showing signs of warming up.”
Changes in Builders and Buyers
Zillow notes that the share of first-time buyers in the U.S. has shrunk to a record low as inventory and affordability issues persist, according to the National Association of Realtors. What impact does this have on homebuyers and builders?
“Builders are opting for more spec communities instead of custom communities," Smith said. “This allows them to keep up with demand and turn a profit quickly.
“I have also seen a shift in the average age of first-time homebuyers due to affordability issues. The average age of a first-time Texas homebuyer is around 32, according to NAR. First-time buyers are looking at more rural or underdeveloped areas to find affordability. Plus, remote work is now a necessity since most first-time buyers are searching for a home on average 50 miles away from their current residence.
Existing Homes Versus Newly Built
Axios also notes that the prices for existing homes are about the same as those for newly built homes.
According to the news service, “New data shows the median price for an existing single-family home, as opposed to a newly built one, stood at $416,000 in June 2023. That's basically the same price that a newly built house was selling for in May, the last month for which we have data. For the last 10 years, prices for new single-family homes have been on average about $60,000 more than existing home sales.
“The surge of mortgage rates over the last year — they're hovering just below 7% — continues to upend the housing market in surprising ways. The rate “lock-in” effect has resulted in a dwindling supply of existing homes on the market, helping to keep those prices elevated.”
This lower inventory and comparable pricing of existing homes change the “game” for new home builders.
“Deciding to purchase a new home vs a resale home comes down to a buyer’s preference and overall budget,” Smith notes. “One of the primary factors in the consideration of new construction vs resale is the availability of the home. Someone who is looking to move immediately might need to consider a resale home since it might take the builder a while to construct a new home, depending on their inventory.
“Keep in mind that sometimes the base price of a new construction home might be less than a resale home. But once modifications and design studio upgrades are factored into the price, it might become more expensive.
“In 2021, I saw more new construction sales since homes were literally flying off the market. Now that the housing market has cooled down a bit, it’s even and boils down to preference. The biggest determining factor is cost. I’ve seen some competitive mortgage and closing cost incentives from builders, which may not be incentives that a traditional (existing home) seller can beat.
“Also, most young buyers I’ve assisted aren’t looking for ‘starter homes’ as in previous years. They’re looking for homes they can keep as a longer-term purchase. This will lead builders to construct homes with more adaptability for growing families by offering ‘room to grow.”’
Working From Home
Concerns about COVID have led more young homebuyers to work from home. Once this flexibility was experienced, many refused to return to the traditional office. Is this desire for home-based work driving the home purchasing trends of young buyers?
According to Smith, “I am seeing many aspiring homeowners who are accepting their company’s relocation package without hesitation. More and more young professionals are opting to move from an expensive area and work remotely. They relocate to a more affordable state and reap the financial benefits of having the same salary in a less expensive housing market. This puts them in a more favorable financial position in the long run.”
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