Nathan Boone

Home Affordability in Mid-MO Continues to Tank

AND SOME THOUGHTS ON WHEN TO CONSIDER STRETCHING YOUR BUDGET VS. WHEN TO PLAY IT SAFE.

BY NATHAN BOONE

PUBLISHED FRIDAY, APRIL 9 2022

Over the last year, the price of the average home in Boone County rose over 13% from $262,390 to $299,519. At the same time, mortgage rates rose by over 1%, further reducing the affordability of homes in Mid-Missouri. 

As a result, many buyers, particularly first-timers and government-backed borrowers (FHA,VA,USDA), are being priced out of the market entirely. Even the most qualified conventional and cash buyers are facing stiff competition for the record low supply of homes on the market.

In this environment, it’s no surprise that many buyers are stretching their budgets to the max just to get into a home. While that approach may make sense for some buyers, for others it may spell disaster.

When to consider stretching

First, let’s define ‘stretching.’

Lenders use a formula called the debt-to-income ratio to calculate how much a particular homebuyer is eligible to borrow. It is calculated by dividing an individual's monthly debts by their gross monthly income. Different loan programs and lenders have their own DTI standards, which we won’t get into here, but most homebuyers are able to borrow more than they can realistically afford. Meaning that if they buy a home at the top of their price range with no changes in their current income, they will be financially strained, or stretched

If you’re interested in learning more about how lenders qualify borrowers, you can find that information here.

On the surface it may seem like it would never be a good idea to stretch, but there are circumstances that can allow a buyer to max out their budget without any long-term ill-effect. In general, buyers who have adequate cash savings (above and beyond what they will need for their down payment and closing costs) and can expect to generate more income in the future or lower their current expenses may reasonably consider stretching their budget for the right home. 

Other circumstances that may enable a buyer to safely stretch their budget include:

  • Financing approval doesn’t take into account bonuses or other sources of income
  • New home will allow buyer to generate additional income 
  • Buyer has little or no consumer debt
  • Buyer has a 3-6 month emergency fund 
  • Buyer is able to save for a retirement fund after all other expenses are paid
  • Buyer is planning on living in the home for a long-ish amount of time (5+ years)

When to stay conservative

Buyers who would need to wipe out their savings or dip into retirement funds to buy their next home should think long and hard before submitting their offer. The same applies to buyers with a lot of consumer debt or who have an uncertain employment future. 

Other circumstances that may discourage buyers from stretching include:

  • Financing takes into account an unreliable source of income
  • Mortgage rates are climbing
  • Home values are at all-time highs and buyer is not planning on living in the home more than 5 years
  • New home will increase buyer's current non-housing related expenses

What to do if you can’t compete

Buyers who find themselves in a situation where they’ve lost multiple bidding wars and are feeling discouraged and ready to give up should know that they’re not alone. This market is brutal and everyone is feeling the pain. 

To repeat what I said earlier, many first-time buyers and those without large down payments or who don’t qualify for conventional mortgages simply cannot compete for homes in Columbia right now. 

Those buyers have a couple of options:

Backing out of the market and renting may make sense if you are planning on moving again within 1-3 years and are able to increase your savings at a rate that outpaces the growth of home prices. On the other hand, if you plan on staying in your new home long-term and are already pre-qualified for a mortgage, suspending your search in hopes that home prices will drop soon may not be the wisest decision. 

So called experts have been predicting an imminent market crash since 2020 and so far they have been consistently wrong. Am I saying that home prices will continue rising at this rate indefinitely? No. That would be impossible. At some point supply will catch up to demand and prices will level out or drop. But, at least in Mid-Missouri, there is no indication that that will happen anytime soon. 

That’s why I warn buyers not to get out of the game if they’re banking on a crash. If it doesn’t happen for 3-5 years (or ever), they will be that much farther behind.

Instead, consider re-evaluating your wants and needs. Do you truly need a larger, newer home? Or can you live with something a little smaller and/or older? The same goes for the area you’re shopping in. If you’re struggling in one part of town, consider widening your search to include less competitive areas. This is especially true for FHA and VA borrowers. Buyers who are unsuccessful in Columbia often have no problem finding a willing seller in Boonville, Ashland or Hallsville.

Recap

This market is tough. For most buyers, success requires some measure of compromise. That may mean stretching your budget or it may mean rethinking the qualities you need in a home. Whichever boat you find yourself in, remember that you’re not alone and that it’s always better to sleep soundly in a house that you can afford than to lie awake in one you can’t.

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