How To Buy a Home in 2024

It’s no secret that home prices have risen tremendously since 2020, rising at a clip of over 20% per year at their peak, and as a result the home price to income ratio has reached a record high of 5.6 times the median household income.

The meteoric rise in home prices combined with average mortgage rates that have more than doubled has made buying a new home next to impossible for many buyers, and not just first-time buyers. Existing homeowners that locked in a low mortgage rate at pre-2021 prices may have a difficult time moving without significantly downgrading their living situation. How do you buy a home in 2024 without breaking the bank?

Is it a smart decision to buy?

Renting a home has never looked better. There are only four major cities in the US where it is currently cheaper to buy than rent, so if you aren’t sure if you’ll be in a home long-term, renting is a comparatively great deal right now. However, that does not mean that renting is right for everyone. If you know you are in it for the long haul, buying a home right now may be a smart decision. When you buy a home, your monthly principal and interest payment are locked in (typically for 30 years). The cost to rent could go up every single year. While it may be cheaper now to rent than to buy, it wouldn’t be surprising if owning your home eventually became much cheaper than renting.

While financially it is much more difficult to buy now than a few years ago, some aspects of homebuying have improved in certain areas. Housing is very market-dependent, but in some areas houses are staying on the market for longer and buyers are able to negotiate on price and get concessions from sellers.

How to buy your first home

Those looking to buy their first home in 2024 have it especially difficult. Not only have prices risen dramatically and interest rates made borrowing more costly, first-time buyers don’t have equity from their current home to help them buy. Because of this, many buyers may not be able to put 20% down on a house. On a $300,000 home, 20% down is $60,000, a big ask for buyers that are also starting to invest for retirement and save for the future. That doesn’t include closing costs, moving costs, and all the other costs that come along with buying a home.

Putting less than 20% down on a home is more risky, but it may be the best option for first-time buyers who would otherwise need to wait years to buy their first home. If you are planning to put down less than 20%, it’s important that you understand the risks that go along with that. Not putting 20% down means you will likely have to pay PMI, or private mortgage insurance, every month. This extra cost falls off when you reach 20% equity in your home and some lenders may even drop it if your home has gone up in value and you now have greater than 20% equity in your home.

Having less equity in your home also means you are at greater risk if your home drops in value. Someone who puts 20% down and experiences a 10% drop may be able to absorb that without going underwater, or owing more on their home than it is worth. However, if you put 3% down and your home drops 10% in value, you could owe more on the home than it is worth. This was a huge problem in 2009, with nearly one in four US home mortgages underwater due to the housing crisis.

Being underwater on your mortgage isn’t necessarily a huge problem if you can comfortably afford your monthly payment and don’t plan on moving anytime soon. So for those putting down less than 20%, you should make sure you can do just that: comfortably afford your monthly housing costs and be able to stay in your home for years. The housing market recovers more slowly than the stock market. Home prices didn’t reach their 2007 peak again until 2017, so it can take a very long time for a house to fully recover in value.

How to buy a new home in 2024

If you are currently a homeowner, buying a new home may not be as difficult for you as it is for first-time buyers, but it likely still isn’t easy. The options available to you at rates over 7% and at prices that have gone up 44% since January of 2020 (and much more in some areas) just may not look that great. Even with the equity in your current home, buying a new home may entail downsizing or moving to a less appealing area. If you can wait and stay in your current home a few more years, that may be a much better option. Many potential sellers are doing just that, with 39% fewer homes for sale now compared to before the pandemic.

Some current homeowners may not have a choice. Maybe your family is growing and you need more space, or you have to move to a new city for work. While renting temporarily may feel like a step backwards, it could be a smart financial decision if you live in an area where renting is significantly cheaper than buying. Nobody can predict the future of housing prices, but with interest rates above 7%, it is much less likely that home prices rise at the same rate they have over the last few years. This means waiting to buy may not be as costly and could even be a very smart financial decision.

If you do have a lot of equity in your current home and can get the new home you want at higher rates and higher prices, there is nothing wrong with selling and buying a new home. A better option, depending on how much you like being a landlord or involved in real estate, may be keeping your current home as a rental and buying a new home. If you bought before 2021 and locked in a low rate and a low price, chances are your home could rent for more than your monthly mortgage payment.

How you can beat the system

If you are willing to be flexible, you may be able to buy a bigger and better home than you ever thought possible. Housing is very location-dependent, and what is unaffordable to you may be a great deal for someone else and vice versa. If you have the flexibility to move to a different state or different city, your money may go a lot further. If moving to a different area is out of the question for you, determine where you are willing to sacrifice. Would it be cheaper to be a little bit further away from work? What if you have a slightly smaller backyard? Or maybe you settle for the house with just a little less space? If you are willing to sacrifice a bit, you could accelerate your home-buying process.

Buying a home isn’t a lot of fun right now. Prices and interest rates have made homes less affordable for new buyers and current homeowners. However, there are reasons to be optimistic. Home prices are no longer rising at the clip they were just a couple years ago. Buyers may now have more flexibility to take their time shopping for a home and negotiate more with sellers when purchasing a home. Buying a home is the most expensive financial decision most of us will ever make, so it’s extremely important to get it right, take your time, and make sure you are buying a home that meets your needs and fits in your budget.