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First-Time Buyers: Tips for Landing a House When Prices Continue to Rise

by Michele Dawson

It's been a mixed bag for first-time homebuyers this year. Interest rates continue to hover near record lows and the number of Americans purchasing their first house continues to stay strong. On the other hand, home prices that continue to nudge upward - in some cases soar - can be discouraging when you're gearing up to buy. But with patience, diligence, and some flexibility, you can become a homeowner.

The National Association of Realtors reported earlier this month that the typical first-time buyer is 32, has a household income of $54,800, and makes a down payment of 6 percent on a house costing $136,000.

And houses in the lower price ranges go quickly.

"Multiple offers on properties that are properly priced are often tendered early in the marketing process," said Realtor Dava Behrens of Corvallis, Ore. "Record sales levels continue to be set. Properties that are priced right, well located and with desirable floor plans sell quickly and often with multiple offers."

Realtors continue to underscore the advantage of low interest rates to first-time buyers.

"Interest rates, at an all-time low, and potentially sliding even lower in the near-term, make this an opportune time for first-time homebuyers to own a home for nearly the same amount as they are currently paying for rent," said Realtor Bob E. Gill of Alpharetta, Georgia.

Despite the enticement of low interest rates - hovering around 5.5 percent for a 30-year fixed loan - rising home prices can be a disincentive for some.

"With a tight inventory of homes available for sale, home prices will continue to rise above historic norms," said David Lereah, NAR's chief economist. "The national median existing-home price is projected to rise 6.0 percent this year to $167,800, while the median new-home price should increase 3.8 percent to $194,700."

With competition so stiff in some parts of the country, and home prices continuing to mount, the most important things you can do are to be prepared, be flexible, and remain diligent. Specifically, you should:

Accumulate as much as you can for your down payment and closing costs, which consists of points (extra fees paid to secure a lower interest rate), origination fees, taxes, title insurance, and financing costs. This will ultimately lower your monthly mortgage payment and potentially qualify you for a better loan. Would a parent consider "gifting" money for the down payment? Under current tax law, any individual can gift up to $11,000 to another individual without any tax consequences to anybody. So a couple could gift up to $44,000 to their child and his or her spouse.

Consider saving for your down payment for a while longer. Put aside what you estimate will be your mortgage payment, insurance and property taxes. In six months you'll know whether you can handle the cost of a mortgage - and you'll have extra cash for your down payment. If rates start to jump too high, then you'll need to decide whether it's more prudent to keep saving or go ahead and buy before interest rates increase further.

Think about waiting to buy until the winter. Summer is traditionally the busiest time of the year for the real estate market. More houses are typically on the market, but there are also more buyers and more competition. If you wait until the late fall or winter, especially December, you're likely to find less competition and owners more eager to sell.

Think about a townhouse or condominium. The NAR says the median existing condo price during the first quarter of 2003 was $150,700. "Younger households, including children of the baby boom generation, are taking advantage of low interest rates and getting into the housing market ... " Lereah said recently. "Lower-end and more affordable condo units are attractive to first-time buyers, especially in high-cost markets ..."

Consider what you want versus what you need. While a kitchen fit for a gourmet chef and a luxurious bathroom may be high on your list of wants, focus on the house's floor plan and how it will accommodate your family. You can always improve your kitchen and bathroom sometime down the road.

When looking at houses, visualize their true potential. Get past the avocado green carpet, dingy walls, and the worn brick fireplace. Remember that carpets can be replaced, walls can be painted, and fireplaces can be replaced or painted.

Consider additional neighborhoods. You may have your heart set on a specific neighborhood, but you may soon realize that it's simply out of your price range. Take a look at other neighborhoods. You'll likely find that homes are less expensive the farther away you get from major job centers. So if you're willing to accept a longer commute, you may end up with a house in which you don't have to sacrifice your wants.

Make reasonable offers. With stiff competition, now's not the time to see how low the seller will go. Make a good strong offer.

Finally, once your offer is accepted, be sure you take the final step of hiring a professional home inspector to make sure the house and its major systems are in good working order.

Published: July 21, 2003

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