First-time homebuyers are coming out of the woodwork amid record-low mortgage rates, according to the latest Realtors® Confidence Index Survey. In June, the share of first-time buyers who purchased an existing home increased to 35 percent of total sales, up from an average of 29 to 32 percent recorded over the past eight years.
The average 30-year fixed mortgage rate fell to 2.98 percent during the week ending July 16th — the lowest it’s ever been since Freddie Mac began tracking such data in 1971. The typical monthly mortgage payment of $1,036 is now more affordable than the median rent payment of $1,045. And unlike rent, which tends to increase by 2 to 5 percent per year depending on where you live, those mortgage payments will stay the same over the course of your loan.
NAR Research Economist Scholastica “Gay” Cororaton broke this down further in a recent blog post, comparing the savings from a mortgage payment to a rent payment in a low-rate environment.
Let’s say you’ve purchased a median-priced single-family home for $298,600 and are able to put 20 percent down and forego private mortgage insurance. Last month, the average rate for a 30-year fixed mortgage stood at 3.16 percent, so your payment would be a reasonable $1,036 per month.
At present, that’s only $9 cheaper than the typical rent payment, but if the rent were to rise at a rate of 2.5 percent per year, that payment would skyrocket to $2,128 per month in 30 years. By owning instead of renting, you could pocket $177,500 during the same period.
“The fact that mortgage rents are fixed while rent rises are one of the causes of the wealth built from homeownership, not counting the equity gain from homeownership,” explained Cororaton.
By paying a lender instead of a landlord, you’ll also benefit from escalating home values. Although prices took a serious hit in the wake of the 2008 housing crisis, within the past 30 years, home prices have appreciated by 77 percent, according to the S&P Core Logic Case Shiller Home Price Index.
“So, if one bought a home in 1989 at $94,308, that home will be worth $261,829 in 2019, or an equity gain of $165,521,” noted Cororaton.
If you’re a would-be first-time buyer but haven’t scraped together a downpayment just yet (side note: you don’t actually have to put down 20 percent), don’t panic. Cororaton emphasized that rates are expected to “remain low for at least a year or two” until the economy gets back on track.
Patience might even pay off in this situation. Pent-up demand from the traditionally busy spring homebuying season has spilled over into summer and house hunters are now competing for a limited number of properties, which is pushing prices up nationwide.
Millennials, who have entered their prime purchasing years, will likely sustain this level of strong demand, but more supply is desperately needed.
“For this to be sustainable, housing starts need to rise again to around 1.5 million, the rate of housing formation,” said Cororaton. “Housing starts fell below 1 million after the economic lockdown delayed permitting and certification.”
Perhaps cutting out avocado toast and lattes wasn’t the key to homeownership, after all!