Do You Want to Buy a House? Saving for a Down Payment is Harder Than Ever

Financial stability and generational wealth for many U.S. households buy a house. Today’s inaccessible housing market makes this difficult.

A. CNET poll It found that one-third of U.S. adults say saving for a large enough down payment would influence their home-buying decision. The high cost of living leaves low- and middle-income families running out of space in their budgets: About 36% say: inflation as one of the main obstacles to hosting in the last two years.

“Many Americans struggle to afford basic needs like medical care and food, let alone save for a major purchase like a home,” he said. Gene Ludwigformer comptroller of the currency and founder of the Ludwig Institute for Shared Economic Prosperity.

This is a stark reminder that rate cuts alone will not unlock the housing market for everyone.

“Lower mortgage rates “help, but that’s only part of the equation,” he said. Doug McCoyDirector of the Center for Real Estate Research at Indiana University Kelley School of Business.

today’s housing affordability crisis It is the product of many factors such as increasing borrowing costs and increasing prices. limited inventory. These obstacles are exacerbated by the high cost of consumer goods and services, limited wage growth, and debt, all of which eat into the ability to save money.

Inflation is improving but that is not the case

according to Consumer Price IndexPrice growth, which measures inflation, is slowing. While things look better on paper, headline inflation figures only paint a broad picture of the economy. Every household has different spending needs and mandatory expenses.

Economically disadvantaged households often face a higher inflation rate than the rest of the population. Working-class households also tend to spend more on necessities like food, gas, and housing; All categories have above-average inflation rates.

For example, Ludwig noted that data from his organization, LISEP, real living expenses It shows that inflation in basic items for low-income families has increased 1.3 times faster than the overall CPI since 2001. The CPI shows housing has increased by more than 54% over the past two decades, but LISEP calculates that housing costs have increased by 109% between 2001 and 2022.

“This trend has not only continued, but also intensified,” Ludwig said. Preliminary calculations show that housing costs will increase by 11.5% in 2023 and 10.4% in 2024.

Wages do not keep up with house prices

Meanwhile, wages have not kept pace with the rise in house prices. More than three in ten American adults (31%) surveyed by CNET Money say getting a raise or higher salary would allow them to consider buying a home.

Average household income in 2023 $80,610It was $70,020 in 2000, which is an increase of roughly 15%. Compare this to the 145% increase in house prices over the same period.

The effects of wage increases are also uneven. Many experts agree that nationally aggregated data does not accurately reflect which areas, populations and industries are more negatively affected by stagnant wages. These measures also do not always take into account how wealth is distributed among U.S. households. The average income of the richest 1 percent of Americans has increased over the past four decades 17 times It’s as fast as the income of the bottom 20 percent, according to the Congressional Budget Office.

Rising prices only increase down payment costs

Rising home prices also mean your savings goals for a down payment are getting further away.

The median home price in August was $433,229. redfin. To make a 20 percent down payment, potential buyers will need to come up with $86,645 (and that’s before too). closing costs) is above the average annual household income.

Homebuyers need to win today more than $100,000 to cover mortgage payments on an average-priced U.S. home. With wages increasing by only 4.6% in August, the average income earner cannot save enough money to buy a home based on income alone.

Expert advice on saving for a down payment in a tough economy

Most low- and middle-income households have limited room for non-essential expenses when the majority of household income already goes to paying for needs like housing and food. There are ways to make it easier to save for a down payment.

• Enjoy high returns on savings accounts and CDs: Compared to traditional savings accounts, which typically offer returns of less than 1% of your money. high-yield savings accounts And certificates of deposit Help your money grow faster. Some of the best APYs are currently closer to 5%. Even if the Federal Reserve lowers interest rates (which means rates on high-yield savings options will also drop), you can still get a significantly better return with these options

• Automate your savings: If you constantly struggle to save money, automatic deposit Transfer it to a special savings account. If you have flexibility in your budget, you can schedule these based on when you get paid or more frequently. It keeps you accountable without adding more mental load. You can also pause automatic transfers at any time if you need extra money.

• Increase your income: If you want to speed up the savings process, finding ways to increase your income will be helpful. greater impact It’s more than just cutting spending. Consider giving a follow well-paying and low-stress side joblike walking the dogs or driving for a ridesharing app.

• Don’t focus on 20% down payment: Saving enough money for a 20% down payment is difficult, especially considering home prices. But 20% not necessary and most people don’t write that much. Most loans require as little as 3% to 3.5% for your down payment, which lowers the barrier to entry. With this, We aim for a larger down payment It will allow you to get a smaller loan (even if it’s less than 20%) and save money over time.

• Explore first-time homebuyer programs: Almost every state offers Programs for first-time home buyersmost include some form of down payment assistance (in the form of a grant or interest-free loan).

In conclusion

High inflation continues to materially impact consumer budgets and the ability to save for home purchases. Low mortgage rates are definitely a positive. But we also need higher wages (and not just for certain segments of the population), stable house prices and more housing supply to fundamentally change the affordability equation in the housing market.