Somethings gotta give, right?

NEW YORK (CNNMoney.com) -- What a difference a year makes when you're in the market for a new home, especially if you're a first-time buyer.

Thanks to a combined jump in mortgage interest rates and home prices, a starter home in many areas of the country could cost you several hundred dollars more per month today than if you bought it last year.

Housing Don'ts
If total cost of owning each month exceeds by 25% or more the cost of renting, you may be better off renting.
Spend no more than 30% of gross income on housing.

Nationwide, median home prices rose at annual rate of more than 10 percent in the first quarter of 2006, according to the National Association of Realtors.

Meanwhile, rates on adjustable rate mortgages, the most common for first-time buyers, are up more than a percentage point.

The rate of home-price gains varies widely from market to market. In Gainesville, Fla., for instance, the median sales price of existing family homes rose 31 percent, or about $50,000, to $210,100 between the first quarter of last year and the first quarter of this year, according to NAR.

The percentage gains were more muted - but still high - in richly-priced markets like the New York City-Northern New Jersey area, where the median price rose 11.2 percent to $458,500, an increase of about $46,000.

So for the first-time home buyer in Gainesville or New York, those price and rate increases can mean an extra $400 to $450 in monthly payments to own a home. That assumes you put down the same amount this year on the home as you would have last year.

If you can't put down 20 percent -- as many first-timers can't -- your monthly bite is likely to be larger because you'll have to take out a bigger loan and you may have to pay for private mortgage insurance, which can run up to $50 for every $100,000 in mortgage debt.

Remember, too, the additional costs cited here do not include the cost of homeowner's insurance and property taxes, which also have been on the rise in many markets, as have utility costs.

So, what are first-timers doing?
Most first-time home buyers ratchet down expectations about what kind of home they can afford once they figure out how much a home will really cost.

But in markets where they're quickly feeling priced out of the market, they're looking to less expensive neighborhoods far from their original preference.

In Gainesville, for instance, a lot of first-time home buyers are choosing communities up to 20 miles from where they really want to live, or they're opting for condos or attached housing, said Gene Ritch, president of Coldwell Banker MM Parrish in Gainesville.

In the Phoenix area, another hot market, buyers are moving up to 25 miles away from the valley since they can still get a three-bedroom house for considerably less than a comparable home in the valley, said certified financial planner Michael Furois.

In New York City, where six-figure-earners with fat savings accounts are at risk of being priced out of former drug dens, moving away from a desirable neighborhood is nothing new. But first-time home buyers are also more likely to opt for fixer-uppers rather than move-in condition housing if it gets them "into the game," said Corcoran senior vice president Wendy Sarasohn.

In terms of financing, banks are willing to offer 100 percent financing so long as a buyer has good credit and liquid assets equal to 5 percent of the purchase price, said mortgage broker Melissa Cohn. Some are even willing to finance 103 percent, in order to cover the buyer's closing costs as well.

In Phoenix, Furois said, the difference between first-time buyers last year and now is greater willingness to go for an interest-only loan if that's the only way they can afford the purchase. The hope being that they will build equity over the next five years via price appreciation, rather than through their monthly payments.

New York-based certified financial planner Stacy Francis of Francis Financial isn't a fan of 100 percent financing or interest-only loans since the point of buying a home is to build equity sooner rather than later.

While these loan structures may pay off in a booming housing market, buyers run the risk of owing the bank should they have to sell when prices are down. At the very least, if prices flatten, they'll have to pay for the selling costs, such as a realtor fee.

Buying vs. renting
Ideally, Francis likes her clients to spend no more than 30 percent of their gross income on housing in high-cost markets like New York City. And she'd like them to shoot for a 20 percent down payment. If that's not possible, she recommends 5 percent to 10 percent down and having enough in liquid assets left over to cover three to six months of expenses, plus the costs of closing, moving, new furniture and bigger utility bills.

Another option, of course, is to drop the search for now and work on building a bigger down payment either by saving more or taking a second job, Francis said.

And if a first-time buyer lives in a market where home prices have showed signs of cooling, it may pay to wait a little and rent in the meantime.

One way to gauge whether it pays to rent or buy is to compare the cost of buying the house you're considering with the cost of renting something comparable.

Gary Eldred, coauthor of "Investing in Real Estate," suggests that if the monthly cost of owning a home -- including mortgage principal, interest, insurance, homeowner's association fees and maintenance -- exceeds the cost of renting a comparable home by 25 percent or more, you're better off renting.

That's because the price of the home is not likely to appreciate enough over the next several years to justify the financial sacrifices you would need to make to own it.

On the bright side, if you do decide to rent, a rising rate environment can work to your advantage. That down payment you've been saving can earn a respectable amount of interest in a CD or money market account.

Re: Somethings gotta give, right?

In New York City, where six-figure-earners with fat savings accounts are at risk of being priced out of former drug dens

thats my favorite part!

Re: Somethings gotta give, right?

that's definitely a generalization. I've kept my eye on the market in a few areas for a few years now. the same houses last year were quite a bit more $$

so I would say that the monthly payments on one of these houses would be the same as last yr since interest rates are higher now.

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I feel like it's to scare people into buying

Re: Somethings gotta give, right?

CNBC today stated that the market has stabalized and in general house prices were up 4-5% this year. Also that things are starting to pick up......

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Re: Somethings gotta give, right?

Posted by SweetestOfPeas

Posted by lululu

CNBC today stated that the market has stabalized and in general house prices were up 4-5% this year. Also that things are starting to pick up......

that's nationwide though.

I think around here it's a bit different. the market on LI is saturated with houses for sale. almost 40,000 on mlsli alone!

Re: Somethings gotta give, right?

Posted by lululu

Posted by SweetestOfPeas

Posted by lululu

CNBC today stated that the market has stabalized and in general house prices were up 4-5% this year. Also that things are starting to pick up......

that's nationwide though.

I think around here it's a bit different. the market on LI is saturated with houses for sale. almost 40,000 on mlsli alone!

Oh I agree things are different on LI - but this article was written for multiple markets, as what was said on CNBC which I was only quoting.....

But personally, I also dont think that there will be a big drop on LI either. That's just me though, I am only speculating, as is everyone else.... No one can really predict what will happen.

Message edited 7/6/2006 4:01:07 PM.

Re: Somethings gotta give, right?

I agree - if interest rates continue to rise the market will continue to soften at the appropriate rate. But unless interest rates spike significanly i dont think the market will crash either..... I think that CNBC is saying the market is stabilizing is because interest rates are also probably going to stabilize at this point.

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[

I understand the principles of economics - I was qouting CNBC though and then i merely stated an opinion.....

Also, you cant tell what stage of the cycle we are in unless you can see the future.....


never said I could- you have your opinion and I have mine

my DH makes his living in the business and so did my Dad-

Re: Somethings gotta give, right?

Rates are rising, I'll give you that, but they are still historically low. Rates will have to spike up full percentage points for any kind of real correction.

While a lot of houses have been sitting (and you can't really gague anything from that 40k number on mlsli - even when I was looking houses weren't removed from there even after they were in contract) houses that are priced right for the area, will sell...regardless of the market.

Message edited 7/6/2006 4:14:20 PM.

Re: Somethings gotta give, right?

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everyone can interpet the same facts differently

I am so over this debate- we seem to have it every week

Re: Somethings gotta give, right?

Posted by Colleen9304

Posted by lululu
so I dont think that any expertise can accurately predict the future....

Of course no one can...or else there would be a lot more wealthy people out there instead of Monday morning quarterback's

Re: Somethings gotta give, right?

on another note... I've read a lot of articles by these so-called experts… I would love to know how they can say that the market here will continue to appreciate. The average household income on LI is $76K. how much higher can they really go?

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Posted by SweetestOfPeas

on another note... I've read a lot of articles by these so-called experts… I would love to know how they can say that the market here will continue to appreciate. The average household income on LI is $76K. how much higher can they really go?