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Navigating the Housing Affordability Crisis: Practical Advice and Traps to Avoid

There is no question that housing affordability is a significant issue in this country as evidenced by the Housing Affordability Index data below:

Goldman Sachs Housing Affordability Index

The previous low point, from an affordability perspective, was right before the real estate bubble in 2007-2008; however, most economists are not expecting another real estate crash this time.

What can you do?

You can start by focusing on what you can control, including:

1) Size: The size of homes has increased significantly over the last 100 years and with that so has our expectations of what a home is. I was recently reading an article where a family was complaining about the affordability crisis and said:

  • “I’ve worked my entire life, I’m not asking for the moon. I should be able to afford a house that is big enough for my family and couldn't imagine doing anything smaller after living in a 3,000 square-foot home"

There is so much wrong with the above it's hard to even know where to begin. Let's focus on "big enough." This is a classic case of confusing needs vs. wants, which is a lesson we all learned in elementary school.

Meme about the real estate space we want vs. the space we need

Additionally, statistically speaking, we rarely use most of the square footage in our homes.

Meme about all the home square footage we never use

2) Duration: A home is a significant asset and it's important to commit for a long period of time. Fortunately, this is one stat that has been increasing and likely will continue to do so based on existing homeowners not wanting to give up their low interest rate mortgages. The average length of ownership is currently 13.2 years. By comparison that same family from the article referenced above was seeking their fourth home and the parents were only 40 years old.

What are some of the common traps to avoid?

1) Refinance: Assuming you will be able to refinance at a lower rate is a huge leap of faith. We have no control over interest rates and as crazy as it may seem to be paying 8% interest, that's actually the historical overage in the United States. Meaning we can likely see rates trend further upwards.

2) Rent: Contrary to popular belief, renting isn't throwing away money. If you can't commit for the long-term, or if owning would stretch your budget beyond capacity, then renting may be your best option.

3) Investment: A primary residence is not an investment. An investment's sole purpose is to increase in value and/or provide cash flow, but your home's purpose is to provide shelter. A home is an asset, but not an investment.

4) Expenses: Owning a home is expensive and you need to be aware of the costs beyond the mortgage, insurance, and taxes. A general rule of thumb is about 1% of the home's valued will be spent on maintenance each year. In other words, a $500,000 home will cost you $3,000 more per year in maintenance than a $300,000.

If you are looking for a solid financial plan that will help you save for a home purchase, please schedule a free introductory meeting below. For less than $5/day, Walk You To Wealth is the most affordable way to access professional help.

Disclaimer: The information in this post is provided for your convenience only and is not intended to be treated as financial, investment, tax, or other advice. The information is intended to be educational and is not tailored to the investment needs of any specific individual.  It is also not intended to be relied upon as a forecast and is not an offer or solicitation to buy or sell any securities or to adopt any investment strategy.  The opinions expressed are those of the author.  Reliance upon the guidance and information in this presentation is at the sole discretion of the individual.

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