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This could be the worst market for a first-time homebuyer, experts say

CNBC logo CNBC 10/19/2021 Andrew Osterland
  • Buying a first home is always a big decision, and a hot housing market untamed by the pandemic has made it harder than ever.
  • Interest rates are a historic lows, and there is high demand and not enough supply.
  • Financial advisors say this could be the worst market for home buyers we've ever seen, and caution clients to perhaps wait.
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Buying a first home is always a huge decision. It's even bigger when the market has been as hot as it has in the last two years.

Financial advisors say this could be the worst market for home buyers we've ever seen, and caution clients to perhaps wait.

Certified financial planner Rick Kahler, founder of Kahler Financial Group in Rapid City, South Dakota, expected the coronavirus pandemic might cool down a real estate market that had been rising for the last decade.

"I told a client 18 months ago not to buy a home, but he did," said Kahler, who lives in Rapid City. "I was dead wrong, of course."

Not only has the pandemic failed to cool the hot housing market, it has kicked it into higher gear. At the end of September, the average home price in the U.S. was $377,000, according to real estate broker Redfin. That's up 14% from the same month last year and a staggering 30% from September 2019, when the average selling price for a home was $291,000.

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The reasons for the rise are clear enough.

"Interest rates are at historic lows, there is a lot of demand for houses in the pandemic and there aren't enough houses for people to buy," said Daryl Fairweather, chief economist at Redfin, noting that the last decade saw the fewest homes built in the U.S. since the 1960s.

"The forces at play in the market are still present," Fairweather added.

Fairweather expects that interest rates will rise by 60 basis points next year, but with the national average annual percentage rate on FHA-approved mortgages at 3.63% on Oct. 13, according to Bankrate.com, that would still be a low rate. She also doesn't believe that the construction industry has the capacity to right the housing supply/demand situation anytime soon because of shortages of both materials and labor.

"I don't think housing prices will come down next year," said Fairweather. "We are in a seller's market, and we are very far from a buyer's market."

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Current homeowners are in the catbird seat. If they "overpay" for a new home, they can make up for it by selling their old one. For first-time homebuyers, however, it's a different story.

"This could be the worst market for a first-time homebuyer that I've ever seen," said CFP Sheryl Garrett. "Don't be in such a hurry to buy a house."

Garrett, founder of the Garrett Planning Network, suggests that some people are driven to own a home for the wrong reasons.

"Our society has a mentality that if you don't own your own house, you're a nobody," Garrett said. "There is nothing to be ashamed about with renting a home."

(Editor's note: Garrett owns a home in Eureka Springs, Arkansas.)

Unfortunately, rental costs are also rising, though not to the same degree as housing prices. Average national rent across all sizes of apartments and homes rose 13.1% in the last two years, according to data from Redfin and RentPath, a digital marketing site.

Despite underestimating the housing market 18 months ago, Kahler also advises patience for first-time homebuyers.

"If you're thinking of buying a home now, I would put it off for a year," he said. "Prices have gone up 20% to 30% in the last 18 months.

"Renting may be a better option now," he added.

Like Garrett, Kahler sees people buying homes impulsively without enough consideration of the commitment involved.

"Buying a home seems to be in our DNA," he said. "People make decisions emotionally — and they can often be poor decisions."

If you are determined to buy a house in this environment, Kahler and Garrett suggest keeping the following things in mind:

  • Do not take on more house than you can afford. Set boundaries for yourself and stick to them. "I see people overspending by $400 to $500 per month to get what they want," Kahler said.
  • Keep your monthly housing costs (which includes taxes, insurance and expected maintenance) at a manageable percentage of your income. "I like 25% of income as a limit," he said.
  • Hire a fiduciary as your agent, not one that serves both sides of the transaction. "Real estate transactions can happen quickly," said Kahler. "You need someone to reach out to for a reality check when counteroffers come up."
  • Make very sure you want to live in the home and the neighborhood for an extended period, suggested Garrett. "A renter can just pack up and move," she added. "If you own the house, you could be stuck in it for months or years."   
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