Fear Is Driving Wannabe Homebuyers Insane

The boiling housing market is frying hopeful buyers' brains. Despite rising interest rates and home prices, bidding wars are on the rise and more buyers are falling into the trap of making home purchases that stretch household budgets too thin.

Two-thirds of people surveyed say now is a good time to buy, according to new Gallup data, with potential buyers outnumbering sellers by more than two to one. All this despite the fact that mortgage rates are at their highest in five years and median home prices are back to their pre-recession peaks. A typical home now costs $240,000, with 30-year mortgages going for 4.55%.

There are other indicators that homeowners are biting off more than they can chew. Home prices are rising faster than incomes, meaning buyers can expect "a larger chunk of their incomes devoted to mortgage payments," according to an April 2018 forecast from research firm CoreLogic. The return of sub-prime mortgages and rise in house flipping are still more signs that buyers are making riskier purchases.

Old school thinking held that buying a home was the smartest adult investment you could make. But that mentality is as outdated as the flip phone. As the Nobel-prize winning economist Robert Shiller pointed out in the New York Times, home values have risen less than one percent a year for the past century, making them "disappointing" investments.

Nevertheless, about a quarter of millennials consider owning a home a badge of adulthood, according to a Bank of America report. Dire warnings that house prices are likely to rise even more in 2018 are fueling the buying frenzy. Social media is part of the problem too: A third of young people look at their friend’s new home posts on Instagram and think, "If they can buy a home, why can't I?", according to the BofA survey.

Before you buy, you might want to be sure that owning is actually cheaper than renting where you live. Some of the best cities for first time homebuyers include Dallas, Indianapolis and Pittsburgh, according to SmartAsset. If you live in San Francisco, Seattle, Portland or Denver, on the other hand, it's actually cheaper to rent than own, according to the Urban Institute.

If you still want a home of your own for personal reasons like having more space for your family or never having to answer to a landlord again, it's smart to get your financial house in order first. That means paying down credit card debt to help raise your credit score so you can qualify for the lowest loan rates when you are ready to buy. It's also smart to start an emergency fund you can use to pay off any unexpected expenses while you are saving.

Creating a separate fund for your down payment can help you avoid the temptation of dipping into it for things like vacations, car repairs or credit card bills. To figure out how much home you can afford, use a mortgage calculator to run the numbers based on the size of your loan. A good rule of thumb is to spend no more than 30 percent of your take home income on housing.

That way, when you finally get the keys to your dream house, you'll be able to sleep at night knowing it's something you can truly afford.

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