You may feel that homeownership is out of your reach if you are also determined to live in an area with high costs. Rent is likely to be expensive and increasing, making saving for a home seem impossible.
You can also buy in places like New York City and most of Southern California to avoid the seemingly constant rent increases, while also acquiring an asset with a high likelihood of appreciation.
Sarah Cotty is a Serhant real estate agent. She says, "You buy New York because of the opportunities." It's a long-term investment.
Here's how to buy a house in a difficult market.
Consider whether you should buy or continue renting
Many people dream of owning a house, but the reality is that it's a big investment and a lot of responsibility. You should consider how much you want to settle in that area. If you become a homeowner it is much more difficult to move away if you get a better job elsewhere.
Depending on where you live, monthly costs can be significantly higher for owning than renting. According to a 2022 report by John Burns Real Estate Consulting, owning a single family home cost $839 per month more than renting. When you buy, you also pay to build equity and protect yourself against rent increases.
Consider your financial and personal situation when deciding whether you should buy or rent.
- Calculate your budget
You've decided to buy, so now you need to determine how much you can pay. Conventional advice says that your mortgage should not be more than three times what you earn. This may not be possible in expensive areas unless you are a high-earner.
According to the U.S. Census Bureau, for example, the median income of a household in Washington, D.C., is $93,547. Redfin reported that the median home price was $643,000 at this time. This is almost seven times more than the median income.
You may need to be creative in such areas to avoid "house poverty." You can do this by taking on a part-time job to boost your income or considering certain tradeoffs. If you live in a place with good public transport or work at home, would you be willing to give up your vehicle so you could afford a house? Consider a modest home or a fixer upper so you can save money and do some work to improve it.
- Consider less expensive neighborhoods
You may find that your dream home or the area you love is not within your budget. This is a sign that you should look at more affordable neighborhoods.
Mercedes Gonzalez Mayo, for example, knew that she would get a better deal in Smithtown than she would in Queens. Riley Arthur bought her home in Chula Vista, rather than the much more expensive San Diego which is only 10 miles away.
Savings for a downpayment
Save for an initial deposit. Your mortgage payment will be cheaper the more money you put down. If you put down 10% on a $500,000 house at 5% rate of interest, then your monthly mortgage payment would be $2,416. (This is before taxes and other fees). Your mortgage payment will be $2,550 if you put only 5% down.
Keep your down payment money in a high yielding savings account. Compound interest will help your savings grow faster, and you can add money to it at any time. CNBC Select has ranked high-yielding savings accounts. Here are our top choices: