Our economy has come a long way since the Great Recession: Wages are going up, unemployment sits at 4.4 percent (the lowest level since May 2007)—and we’re in the midst of the second-longest bull market ever.
What isn’t growing at an impressive pace? Americans’ confidence in the housing market.
Despite other positive economic indicators, rising home prices and uncertainty about the election left the ValueInsured Housing Confidence Index flat last summer. And while optimism briefly shot up post-election—particularly among millennials—it’s dropped again: In March, the Fannie Mae Home Purchase Sentiment Index decreased 3.8 percent overall, with the percentage of Americans who think now’s a good time to buy falling 10 percent.
What are we so worried about?
In January, nearly 60 percent of Americans said they thought there could be another housing crisis in their lifetime. While that can be difficult to predict, there are some familiar factors at play: As home prices continue to heat up across the country, borrowers are increasingly pursuing riskier mortgages with too-small down payments. What’s more, an Owners.com survey found that 55 percent of Americans are willing to bust their home budgets by an average of $40,000.
“As housing prices move up relative to income, the harder it can be for people to buy homes [without overextending themselves],” says Bob Phillips, managing principal of Spectrum Management Group. But it’s not impossible.
How to protect yourself: Buy in a desirable neighborhood with limited housing inventory, where you’d be happy to live for awhile. And wait until you find something in your price range and you’ve banked a 20-percent down payment. Even if mortgage rates go up, as expected, we’re still near historic lows, so it’s worth waiting till you’re ready. Speaking of which…
Saving up a down payment is a lofty goal—one people in their 20s and 30s in particular aren’t confident they can accomplish. In January, just 44 percent of millennials believed they could afford a down payment, compared to 45 percent of Gen Xers and 52 percent of Baby Boomers.
But just like any goal, you can eventually achieve this one by taking a lot of incremental steps in the right direction.
How to protect yourself: Estimate how much you’ll need—ideally, 20 percent of the total home price in order to avoid private mortgage insurance (PMI)—and set up an automatic transfer to a dedicated high-yield savings account. Every few months, increase your contributions and contribute other windfalls, like tax refunds or bonuses, to the account.
Last summer, more than half of Americans said the possibility of a job change or loss makes purchasing a home a lot riskier—and they’re right. “When people buy a home, they are usually investing some money in remodeling, and it takes some time for the home price to appreciate enough to recoup the costs,” Phillips says. “Plus, when selling, you [have to factor in] real estate commission of 5 to 6 percent of the purchase price.”
How to protect yourself: If you’re ready to put down roots, establishing firm financial footing and buying a home in a desirable area for resale can assuage these fears. “If you have an emergency fund of at least six months of living expenses, including your mortgage, the odds of losing your home because of a job loss are minimal,” Phillips says. (And you can always rent it out to offset the mortgage and rent someplace else, if you have to.) Having a cash cushion also protects you if you’re hit with an unexpected bill or major repair.