Recent Home Buyers Stretched, Future Hunters Optimistic

Buying a home is often an exercise in patience and commitment. At some point in the search or bidding war, you may ask yourself, “How badly do I really want this?”

For some recent home buyers, the answer has been, “badly enough to make concessions” at one end, and “badly enough to blow my budget” at the other, according to data from new NerdWallet surveys conducted online by The Harris Poll in January.

“Home buyers have been on a dizzying, twisty journey,” NerdWallet home expert Holden Lewis says. “A year ago at this time, mortgage interest rates were low and competition for homes was fierce. Rates moved higher in much of the fall, reducing affordability and knocking some buyers out of the market. Now rates have dropped again. Because so much of the homebuying experience depends on timing and location, it’s not surprising to see a wide array of sentiments across recent and prospective buyers.”

In the 2019 NerdWallet Home Buyer Report, we look closely at how much recent American home buyers compromised to make their homeownership dreams a reality and where they could have saved money. We also examine how those recovering from foreclosure feel about owning again, and how many Americans will be shopping for a new home in the coming years.

But first, some increasing optimism: 42% of Americans say they feel better this year about their overall ability to purchase a home compared with a year ago. When we asked the same question in December 2017, just 28% shared that optimistic sentiment. Further, 44% say the current economic and political climate would make them more likely to purchase a home in the coming year, if they were in the market. In the 2018 Home Buyer Report, just 35% said the same.

Key findings

Upping the ante. Nearly half (45%) of Americans who’ve purchased a home in the past five years offered more than asking price before having their offer accepted.

Feeling the pinch post-purchase. One-fourth (25%) of American homeowners say they no longer felt financially secure after purchasing their current home — and more than one-third (34%) of first-time home buyers identified with this sentiment.

Missed savings by the millions. American home buyers could save $776 million in a single year by comparing mortgage rates among lenders before applying, according to NerdWallet’s analysis. That’s over $400 per borrower in the first year of a 30-year mortgage.

More Americans looking to buy. Thirty-six percent of Americans plan to buy a home in the next five years, compared with 32% when we asked in December 2017. Of them, 24% say they’ll be making the purchase within the next 12 months.

Some hesitancy after foreclosure. Thirteen percent of Americans have lost a home due to a financial event such as foreclosure in the past 10 years. More than 6 in 10 of them (61%) have not bought a home since, and 20% of those who haven’t repurchased say they never plan to again.

Down payment misconceptions. More than 6 in 10 (62%) Americans believe you must put at least 20% down in order to purchase a home. The truth: 32% of current U.S. homeowners put 5% or less down on their home, according to census data.

Recent market drove concessions and blown budgets

In a seller’s market, home buyers are forced to make compromises in how they shop for a home and what’s on their wish list. Recently, with affordable homes in short supply, buyers have done exactly that.

Six in 10 (60%) Americans who bought a home in the past five years had to make more than one offer before closing, and 37% had to make three or more, according to the survey. This included the home they ended up buying and any others they competed for. On average, these buyers put three offers in before closing.

Not many were successful in getting sellers to come down on price: 45% who recently purchased offered more than asking price before going under contract while 31% had an offer below asking price accepted. One in 10 (10%) offered 10% or more over asking price.

Home buyer takeaway: You’re not guaranteed the house you want, in the neighborhood you prefer, at a price below your target budget. Go into house shopping with a realistic vision. Get real about your must-haves and what you can be flexible about. And know the market; talk with your agent (or several, if you haven’t chosen one yet) to know just how tight things are in your area.

“I encourage home-shoppers to approach the process in a spirit of discovery,” Lewis says. “You might find your priorities shifting — for example, you might realize that you’re willing to pay more for a smaller place in exchange for a shorter commute. What I’m saying is: Don’t hesitate to change your mind while house-hunting. You’ll go through less stress if you’re flexible.”

First-time home buyers find less wiggle room

For newcomers to the housing market, buying in the past five years was even harder. More than half of recent first-time home buyers (56%) offered more than asking price before having their offer accepted, compared with only 35% who recently bought their second or subsequent home. For 15% of first-time home buyers, that offer was higher than they were comfortable with, compared with about half that (8%) of those who bought their second or subsequent home.

On average, recent first-time home buyers put in 3.8 offers before having one accepted. Those who’ve bought before put in 2.5 offers, on average, before closing.

First-time home buyers aren’t only less experienced than those who have purchased before; they’re likely to be younger and on a leaner budget. In a market where affordable single-family homes are difficult to come by, those with less to spend stand to feel squeezed more.

Indicative of this, one-fourth (25%) of American homeowners say they no longer felt financially secure after purchasing their current home. More than one-third (34%) of first-time home buyers identified with this sentiment, compared with 17% of those who own their second or subsequent home.

Home buyer takeaway: Set a firm budget, and don’t base it on the mortgage you qualify for. Lenders may offer you a bigger mortgage than you need, or one where the monthly payments push your expenses to their breaking point. Once you’ve determined your budget, don’t go above it without taking a serious timeout to determine whether there are other places you can cut spending. An expensive home can easily turn into a long-term regret.

For all buyers, rate shopping is key

List prices and bidding wars are one thing, but many home buyers are missing out on an often overlooked savings opportunity in homebuying: shopping for the lowest interest rate on their mortgage.

Half (50%) of home buyers look at only one lender before applying for their mortgage, according to NerdWallet’s analysis of the National Survey of Mortgage Originations. Comparing lenders can help borrowers save on mortgage interest.

Assuming a 30-year, fixed-rate $260,000 mortgage, a buyer could save $430 in interest in the first year alone by comparing five lenders before applying. Across all home sales, that means Americans could save $776 million in one year.

Home buyer takeaway: Comparing mortgage lenders isn’t difficult, but it does take a little time. You can use a mortgage comparison tool to look at rates side-by-side, and compare how much you’ll save on monthly payments and over the life of your loan.

Increase in prospective buyers

Existing home sales fell 3.1% from 2017 to 2018, according to data from the National Association of Realtors. Despite this and new homeowners’ compromises in the homebuying process, the number of Americans hoping to buy soon has increased. Thirty-six percent of Americans say they plan to buy a home in the next five years, compared with 32% who said the same thing in December 2017. Of those planning to purchase, nearly one-fourth (24%) say they will in the next 12 months.

“Home prices are still going up, but at the slowest pace in two years,” Lewis says. “Affordability is still a struggle, but looking for a home is an act of hope. The combo of slower price increases and low interest rates should bring out more shoppers this homebuying season than in years past. Buyers of moderately priced homes will still face strong competition in most markets. First-timers should expect to make multiple offers before landing a home.”

Owners previously burned consider buying again

Some of those eyeing the market could be former owners who lost their homes in the foreclosure crisis. Foreclosures peaked in 2011 during the crisis, according to data from CoreLogic. More than 1 in 10 Americans (13%) say they’ve lost a home in the past 10 years due to a financial event such as foreclosure, short sale or bankruptcy. More than 6 in 10 (61%) of them have not purchased a home since their financial event.

One in 5 (20%) of those who haven’t repurchased say they plan on never buying a home again, but 58% say they plan to buy again in the next five years.

Home buyer takeaway: Being cautious is savvy, for all buyers. If you’ve previously lost a home due to foreclosure or other similar event, you know what’s at stake. Take your time when researching your loan options, your budget and the homes available to you. Also, have at least a few months of living expenses set aside in an emergency fund — if an unexpected event like a job loss hits, you’ll want to be prepared.

Misconceptions remain about down payments

More than 6 in 10 Americans (62%) believe you need at least a 20% down payment to purchase a home. When we asked a similar question in the 2017 Down Payment Reality Report, 44% said they believed you need to put down 20% or more. For many, a 20% down payment may be out of reach. And the truth is, home buyers don’t need that much.

As a matter of fact, the largest share of current U.S. homeowners (32%) put 5% or less down on their current home, according to 2017 data from the American Housing Survey.

Home buyer takeaway: A 20% down payment is a nice goal; the more you can put down, the less you have to borrow and pay interest on. But there are many ways to put less than 20% down on a home. When considering your down payment options, remember: A smaller down payment may get you into homeownership sooner, but the more you’re able to squirrel away before buying, the less of a pinch that monthly payment will be.

METHODOLOGY

The home buyer surveys were conducted online within the United States by The Harris Poll on behalf of NerdWallet from Jan. 16-18, 2019, among 2,029 U.S. adults ages 18 and older and from Dec. 7-11, 2017, among 2,165 U.S. adults ages 18 and older. The home loss survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from Jan. 8-10, 2019, among 2,031 U.S. adults ages 18 and older, among whom 234 experienced a home loss in the past 10 years due to a financial event. These online surveys are not based on probability samples and therefore no estimates of theoretical sampling errors can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Maitri Jani at [email protected].

Americans who “recently purchased” homes or “recent home buyers” refers to those who have bought a home within the past five years.

We calculated the number of American home buyers able to save using lender comparison data from the National Survey of Mortgage Originations and home purchase mortgage originations from the Home Mortgage Disclosure Act. We calculated the potential amount saved per borrower in the first year using the rate of potential savings from a 2018 Freddie Mac report, the most recent annual average interest rate on 30-year mortgages and the average home loan size in 2017.