MONEY buying a home

Our Dream House Was a Money Pit

150529_REA_DreamHome
Perry Mastrovito—Getty Images

Here's how we dug ourselves out of a financial mess.

Once upon a time purchasing a home landed at the very top of my bucket list.

At 25 years old it felt like the next logical step in growing up—a move that would inch my wife, Jessica, and me closer to the American dream.

From the outside it appeared we were ready for it. We’d built up our emergency fund, paid off our car loans, and started setting aside cash for a down payment. We did everything by the book.

Well, not everything.

When it came time to pull the trigger on our new home, we completely maxed out our budget—effectively signing ourselves up for months of financial strain, emotional stress and major regret.

Landing Our Dream Home—$50K Over Budget

In 2009 Jessica and I were living in the Dallas–Forth Worth area. At 23 and 24 years old, respectively, we were doing great.

I was a firefighter/paramedic, and Jessica was studying photography at the University of North Texas while working as a preschool teacher. Together, we pulled in $75,000—and had zero debt, no kids, and about $25,000 saved up between our emergency fund and retirement accounts.

We were renting a one-bedroom apartment for $750 a month, but loved the idea of putting down roots and moving into a home where we could eventually raise a family.

So, with giddy excitement, we began house hunting for properties in the $150,000 to $170,000 range—a number we settled on after plugging our finances into an online mortgage calculator.

We also decided to look into an FHA loan for first-time homebuyers, which would only require us to make a 3% down payment. I knew 20% was the rule of thumb, but it just wasn’t really something I saw other first-time buyers my age doing. Plus, putting down 3% would preserve some of our savings, and I liked having a reliable cushion to cover us in emergencies.

Two months into our search, we noticed a “for sale” sign on a stunning house just a few doors down from a home we’d just viewed. When our realtor offered to give us a peek on the spot, it was love at first sight.

The house was enchanting: It was just a few years old, with four full bedrooms, 2,400 square feet, and a lush backyard. We couldn’t find anything wrong with it, until we heard the price—$206,000.

We knew it was well over our budget, but couldn’t bear the thought of letting it go. Plus, we’d been pre-approved for a $200,000 loan, which felt like permission to purchase a home of that size.

In hindsight, I know this was a terribly risky move, but at the time I didn’t know any better. And none of our friends or family advised us against buying the home.

After the closing costs were said and done, the total came to around $207,000. We plunked down $7,000—and moved in August 2010.

Plenty of House, Not Enough Cash

Although we loved the home, we were instantly struck by our high expenses.

While our original $150,000–$170,000 price range would have put our housing costs at a manageable 30% of our total income, springing for a $200,000 loan shot that number up to just shy of 50%.

But we felt confident we could handle the expenses, since I was banking on a steady flow of raises from my employer. (Spoiler alert: They didn’t.)

We’d just have to tighten our belts to sustain our $2,000 housing bills, which included the mortgage, insurance, taxes and utility bills.

That meant some serious lifestyle changes, like declining after-work drinks with friends and passing on the dinner date nights we loved. We couldn’t even afford to fully furnish and decorate the place—inviting friends over to an empty house was really tough on my pride.

Even worse, our new bills put an end to the $250 savings contribution we used to make every month. And forget about retirement—our nest eggs were put on hold entirely after moving into the house.

In a matter of months, we had gone from feeling financially flush to pinching every penny—a change that put unnecessary stress on our marriage. More and more we found ourselves nitpicking and bickering with each other.

Over the next nine months, as Jessica and I had many conversations about our decision, it became more apparent that we were being seriously weighed down by the house. We felt stuck, and began to wonder: Had we made a huge mistake?

About a year and a half after moving in, we made the drastic decision to put the house on the market in August 2012. There was no straw that broke the camel’s back—you can only go so long living paycheck to paycheck before you realize that something’s got to give.

While waiting for it to sell, we did everything we could to start saving again. We had a feeling we might take a loss on the house, and wanted to lessen the sting. So we began selling our belongings—our boat, TV, cars—and socked away the profits.

Jessica and I also explored ways of bringing in additional money on the side. She picked up freelance photography work, while I began building websites. All in all, we were able to shore up an additional $15,000.

We finally sold the house at the beginning of 2013, taking a $10,000 loss. While the hit didn’t feel good, the sale took a massive weight off our shoulders.

Our New Life: House Poor, Cash Rich

Armed with about $30,000 in savings and two travel backpacks, Jessica and I did something even crazier after giving up our homeowner status: We left our jobs—and decided to travel the world.

For two years we went all over Europe and South Asia, mastering the art of budget travel. We picked up odd jobs teaching English, painting houses—and even herding sheep! I also continued to do some web development work, and invested in a few blue-chip stocks.

By the time we returned to Texas in the fall of 2014, we had about $100,000 to our names—and were ready for a fresh start.

Jessica is still doing freelance photography work, as well as running a few photography workshops. And I continue to take on web development projects.

But, in a strange twist of fate, I also decided to break into the real estate industry. A few months ago, I earned my realtor’s license and was recently hired at a national agency. I’m looking forward to helping guide other first-time buyers to find a great house—in their budget.

Although we’re certainly not in any hurry to buy another home, if we ever do I’ll definitely be taking my own advice: Buy only what you can afford.

As you might imagine, living out of a backpack for two years really changes your priorities when it comes to material possessions. Having financial security and a better quality of life now means much more to us than a fancy house.

In the end, our version of the American dream has turned out to be different from most. But I’m happy that it’s ours.

(as told to Marianne Hayes)

More From Learn Vest:

MONEY buying a home

Why You Still Can’t Afford to Buy a House

DreamPictures—Getty Images

Homeownership is at a 25-year low

Last month did not bring good news for those looking for evidence of a housing recovery. According to the Commerce Department, the seasonally adjusted home ownership rate for Q1 2015 sank to 63.8% — a number not seen since 1989. That represents a 1.2% decrease from Q1 of 2014, a 0.2% drop from Q4 2014, and the continuation of a general ten-year decline from a peak of over 69%. A few more months of this trend would put home ownership in historically low territory.

At the same time, household formation (those striking out on their own) increased by 1.7 million in Q4 of 2014 and another 1.5 million in 2015. Home prices are continuing to rise according to the S&P/Case-Shiller index, and the inventory level of unsold housing has dropped below five months according to the National Association of Realtors (NAR). Six months is a typical supply for a healthy housing market.

So, the number of households is increasing, the housing supply is low, and prices are rising — yet the number of homeowners keeps decreasing. How does this add up?

It appears that too many of these new households still cannot afford to buy a house, at least not the ones that are available to them. They are forced to rent instead, and as a result, that market is also out of balance. Diana Olick of CNBC reports that rental vacancies are hitting historic lows. The current market could be considered a “pre-recovery” stage, if you will — millennials and those knocked down by the housing crisis have recovered to the point where they can enter the rental market, but not to the point where they can afford to buy a home even with the currently low fixed interest rates.

There is a cascade effect going on in the housing market that will take some time to remedy. Those who want to upgrade their homes are having difficulty gathering down payments and qualifying for loans, thanks to wages that are still stagnant and credit that is still relatively tight. Thus, the supply of starter homes is low, making first-time ownership difficult for those who have recovered enough to qualify. Some signs of wage pressures and loosening credit are present, but not enough to fuel a true recovery.

In terms of numbers, the calculation methods may make the situation look worse than it really is. Since the overall number of households is increasing and the majority of these are renting, the number of homeowners relative to the total is shrinking. It is not as though large numbers of people are losing their homes, as was the case during the housing crisis.

Many economists expect the decline in home ownership to begin stabilizing finally and to stay stagnant until the true recovery phase can kick in. A combination of rising wages, job increases, government approaches to make credit more affordable to first-time homebuyers, and the general decline of underwater homes through home appreciation should lead to a housing upturn. Of course, the question on everyone’s mind is: how long will it take to reach full recovery and convert renters into first-time homebuyers?

Nobody has that answer, and the housing market has defied most predictions of recovery over the last few years with frustratingly mixed progress. However, we can predict one thing with certainty. If the housing outlook is still struggling at this time next year, politicians and policymakers up for re-election will panic and start to take action, most of which will probably be misguided. Let’s hope the market intervenes before the politicians can act.

More From MoneyTips:

MONEY home prices

10 States With the Least Affordable Homes

Diamond Head, Oahu, Hawaii
Carl Shaneff—agefotostock Diamond Head, Oahu, Hawaii

A new study shows where in the U.S. home prices are the most out of whack with income.

In most parts of the country, a family with a median household income should—ideally—be able to afford a median-priced home in that area. In fact, an analysis of county-level data from RealtyTrac showed that a monthly payment on a median-priced home was more affordable than fair-market rent on a three-bedroom unit in 76% of counties studied, making buying a home the more economical choice for many Americans.

Of course, there’s a lot more at play when determining if you can afford a house than looking at your paycheck and the rental market—buying a house often requires a home loan, which can be tougher to come by if you don’t have good credit. At the same time, a good credit score will only get you so far in the home-buying process, because if housing in your area is exceptionally expensive, even a median household income may not get you much house. (This calculator can show you how much house you can afford.)

To determine the states where housing is least affordable, the Corporation for Enterprise Development divided the state’s median housing value by the median family income in that state, according to 2013 Census data. A breakdown of all 50 states and the District of Columbia is available through its Assets & Opportunity Scorecard tool. Here are the states with the least affordable homes.

10. (tie) Rhode Island

2013 median housing value: $232,300
2013 median household income: $55,902
Ratio of median housing value to median income: 4.2

10. (tie) Vermont

2013 median housing value: $218,300
2013 median household income: $52,578
Ratio of housing value to income: 4.2

8. Washington

2013 median housing value: $250,800
2013 median household income: $58,405
Ratio of housing value to income: 4.3

7. New Jersey

2013 median housing value: $307,700
2013 median household income: $70,165
Ratio of housing value to income: 4.4

6. Oregon

2013 median housing value: $229,700
2013 median household income: $50,251
Ratio of housing value to income: 4.6

5. New York

2013 median housing value: $277,600
2013 median household income: $57,369
Ratio of housing value to income: 4.8

4. Massachusetts

2013 median housing value: $327,200
2013 median household income: $66,768
Ratio of housing value to income: 4.9

3. California

2013 median housing value: $373,100
2013 median household income: $60,190
Ratio of housing value to income: 6.2

2. District of Columbia

2013 median housing value: $470,500
2013 median household income: $67,572
Ratio of housing value to income: 7

1. Hawaii

2013 median housing value: $500,000
2013 median household income: $68,020
Ratio of housing value to income: 7.4

Those are some eye-popping figures, especially if you’re from the other end of the spectrum, like Iowa or Michigan, where the median home price is just 2.4 times the median income in those states. Places like Hawaii, D.C. and California are significant outliers, though.

Nationwide, the median-priced home ($173,900) is 3.3 times the median household income ($52,250), but homeownership remains out of reach for many Americans. Homeownership rates are at their lowest level in more than two decades, partially due to tight credit in the mortgage market. To have the best chance at getting a home loan, borrowers need to focus on improving their credit standing (you can track your credit scores for free on Credit.com) and paying down debt, so they can prove their ability to repay a home loan.

More from Credit.com

This article originally appeared on Credit.com.

MONEY home improvement

How to Squeeze the Most Value From Your Home

woman in kitchen
Getty Images

Buyers and sellers are getting busy, but if you're planning to stay put, low rates on home equity loans and lines of credit make this a good time to remodel.

In part one of our Spring Real Estate Guide, we told you what to do if you’re in the market for a home this year. In part two, we offered tips for sellers. Today we’ve got advice for those who want to say put and add value with smart home improvements.

It’s always nice to remember that the value of your house should climb while you’re enjoying it—and at a great mortgage rate (assuming you take the advice below about refinancing!). If you’re at the love-it rather than list-it stage of your life, remodeling may be a good option. Nationwide, 57% of home-owners surveyed recently by SunTrust said they planned to spend money on home-improvement projects this year. But be warned: The competition for contractors in many markets is fierce. You may have to wait your turn in line.

If you’re staying where you are, here are three ways to get the most out of the home you’re in.

Hit the refi table. According to CoreLogic, roughly 30% of all primary mortgages still carry an interest rate of 5% or higher—even though the average fixed rate today is 1.3 points lower. If you took out a $300,000 loan in mid-2009, say, and refinanced the roughly $270,000 balance at today’s rates, you’d cut your payments by about $370 a month.

You might consider making a few other changes. First, don’t assume that your current lender will offer you the best deal this time around—different lenders are marketing different kinds of loans.

You might also want to switch to a 15-year fixed-rate mortgage, especially if you are a decade or so from retirement and looking ahead to reducing your debt. You’ll pay more each month: about $170 more than the current payment on the $300,000 30-year mortgage at 5% cited previously. But you’d retire the loan nearly a decade sooner and save tens of thousands in interest.

There’s a good reason some homeowners haven’t refinanced at all: They couldn’t. In 2012 about a quarter of homeowners owed more on their homes than the houses were worth. Thanks to rising property values, that’s changing. Today only 11% of owners have negative equity, according to CoreLogic.

If you’re one of them, you may still be able to refinance, perhaps without having to bring cash to the table. Borrowers with FHA and Veterans Administration loans are eligible for “streamlined” refinancing, which looks at payment history rather than equity. For borrowers with conventional mortgages, the Home Affordable Refinance Program (HARP) is still available and has undergone some improvements since it was introduced in 2009. If you were turned down before, it’s worth another shot, says Keith Gumbinger, vice president of HSH.com, a mortgage information provider.

Get the right renovation financing. For a project that requires a one-time loan and at a fairly predictable cost—say, a bathroom—you may want to consider a home-equity loan, says Gumbinger. The 5.9% rate isn’t all that favorable, but you have the security of its being fixed. For a larger project in which you’ll need ongoing access to funds, a home-equity line of credit can be a better option since it operates like a credit card. HELOCs are now ringing in at 4.8%. The downside is that the rate is variable, so if you won’t be able to pay the debt off in two years, it might not be your smartest choice.

Think about the next owner. According to a 2014 survey by Houzz, 53% of homeowners who are remodeling say they are hoping to increase their home’s value. Yet most upgrades won’t help your resale. The most common remodeling projects are kitchens and bathrooms—9.5% and 7.7% of all upgrades, according to Harvard’s Joint Center for Housing Studies. But according to Remodeling magazine’s 2015 Cost vs. Value report, you’ll recoup only 70% of costs on a bathroom remodel, 59% on a bathroom addition, 68% on a major kitchen remodel, and 79% on a minor kitchen. (The only project that recoups more than its cost: installing a steel front door, which runs from $500 to $750.) That doesn’t mean you shouldn’t renovate; just know that you’re not going to get back all of what you put in.

No matter what project you choose, consider adding improvements to appeal to aging baby boomers. According to the Joint Center for Housing Studies, just over half of existing homes have more than one of five key features for aging in place. Notably, only 8% have wide doorways and hallways or levered door and faucet handles. Those could become huge selling points. Just think: Those renovated doors could provide the perfect entrée to your next great home.

Read next: If You Want to Buy a Home Here’s What You Need to Do Now

MONEY Housing Market

6 Smart Real Estate Moves That Will Pay For Themselves

Whether you're new to the housing market or already live in the home of your dreams, these 6 moves can help put money in your pocket.

 

  • Rent Until You Can Stay Put

    rental sign in front of apartment buildings
    Alamy

    When deciding whether to rent or buy a home, don’t forget the fees, commissions, and closing costs that come with buying, says Darrow Kirkpatrick of CanIRetireYet.com. Local prices and appreciation trends matter too. Use the rent/buy calculator at Trulia.com to see the tradeoffs. A good rule of thumb is to rent if you might move in three years or so. (For more help with the decision, see “Should I Rent or Buy a Home?“)

  • Ready to Buy? Remember 28/36

    woman looking at real estate signs
    Dave and Les Jacobs—Getty Images

    Eight years after the real estate crisis, lenders are making mortgages more accessible. But don’t go back to the old days of high borrowing, even if a lender offers some wiggle room. Housing should take up no more than 28% of gross monthly income; housing plus other debt, 36% or less.

  • Fix Up Your Home—the Cheap Way

    home with new driveway
    Greg Nicholas—Getty Images

    Looking to sell fast? Curb appeal literally gets buyers in the front door. An overlooked simple project: a fresh seal coat on the driveway, which “gives a pop” of a first impression, says Kokomo, Ind., agent Paul Wyman.

  • Fix Up Your Home—the Luxe Way

    attic bedroom
    Martin Barraud—Getty Images

    You’ll get the most bang for your buck by adding living space, says Craig Webb of Remodeling magazine. An attic bedroom and basement remodel average $51,700 and $65,400, but, he says, “buyers will appreciate that you made space that wasn’t previously available.” (For a rundown of major projects and what they return in your area, check out Remodeling‘s annual Cost vs. Value survey.)

  • Ditch the 30-Year Mortgage

    Local and Express subway signs
    John Ott—Flickr Creative Commons

    The 30-year mortgage has been called the best friend of the middle class, since it allows families to buy bigger homes. But is that in your best interest? Meet your new buddy: the 15-year loan. The shorter term makes you stay on a tighter budget. The trick is to commit before picking a house, because “that really forces you to save,” says financial planner Ron Rogé. Say you can afford $1,950 payments on a $400,000 home with a 30-year loan at 3.75%. With a 15-year at 3%, you’d have to settle for a $310,000 home. But you’d have a better shot at retiring debt-free. And the total cost savings are immense.

  • Pick the Right ‘Hood

    Ample Hills Creamery ice cream shop, Prospect Heights, Brooklyn, New York
    Richard Levine—Alamy Brooklyn, New York

    “Don’t buy in the part of town that’s already hot—you’ll have missed the opportunity to buy low and sell high,” says Stan Humphries, chief economist at Zillow. Look in an adjacent area “and wait for the cool to come to you.” And don’t listen to that old saw about buying the worst home on the best block. That will bite you when it comes time to sell. One surprising indicator of value? Starbucks. “Homes within a quarter-mile of Starbucks doubled in value, whereas the average home in the U.S. appreciated 65%” from 1997 to 2013, Humphries says.

    Adapted from “101 Ways to Build Wealth,” by Daniel Bortz, Kara Brandeisky, Paul J. Lim, and Taylor Tepper, which originally appeared in the May 2015 issue of MONEY magazine.

MONEY buying a home

This Spring’s Hottest Real Estate Markets

North Beach, San Francisco Bay Area homes
Christian Heeb—Getty Images North Beach, San Francisco Bay Area

Buyers need to move a bit faster this year in order to snag their dream house, even in some of the slowest-moving markets. Homes are going especially quick in the San Francisco Bay Area, Southern California, Seattle, and Salt Lake City.

Housing inventory remains tight, and one of the questions on the minds of many homebuyers this spring is just how fast they will have to move to get the home they want and can afford.

To find out how long homes are staying on the market, we calculated the share of homes for sale on Trulia over a two-month period. We first looked at homes listed on February 5, then counted how many were still for sale on April 5. Faster-moving markets had a lower percentage of homes still on the market after two months, while slower-moving markets had a higher percentage.

Trulia_FastestMovingMarkets_Infographic_Apr20151

Our two-month measure is similar to a common housing statistic: days on market (DOM). In general, housing markets with more inventory and fewer buyers will have a higher share of for-sale homes remaining on the market after two months and a higher median DOM. But we prefer our two-month measure over the widely watched DOM as a way to determine how quickly homes are moving in a market.

Why? We think DOM is potentially misleading. If lots of new inventory suddenly lands on the market, then the median DOM could fall thanks to all those newly listed homes. Thus, a low median DOM might indicate that buyers are snapping up homes quickly, so homes aren’t staying on the market long (a seller’s market). But it could also signal that a lot of new inventory has just come onto the market (a buyer’s market). As a result, it’s difficult to decipher what’s really going on based on DOM alone.

Looking for a Bargain Home? So Is Everyone Else

Nationally, 60% of homes listed for sale on February 5 were still on the market on April 5, down a bit from 62% for the same period last year. What’s quickening the pace of sales? It turns out it’s homes priced at the low end of the market. To see this, we evenly divided all homes in each of the 100 largest U.S. metros into three price tiers.

We gave each metro its own price cutoffs based on what’s considered high-end, mid-range, and low-end locally. On average, lower-priced homes moved fastest. Only 50% of homes in this tier were still on the market after two months compared with 65% of higher-priced homes.

What’s more, home sales in the low-price tier sped up more compared with a year ago than sales in other tiers. The share of low-price homes still on the market after two months dropped 3 percentage points, compared with a 1 point drop for middle-tier homes and a 1 point increase for high-tier homes. As always though, the national trend hides big differences from one local market to another. In many metros, the sales pace is quickening, while in others it is slowing.

Trulia_FastestMovingMarkets_BarChart_Apr2015

California: Home to America’s Fastest-Moving Housing Markets

If you’re a home seller, California may indeed be the Golden State. Eight of the 10 fastest-moving housing markets are there, and homes are selling much faster than in the Northeast, South, and Midwest. In fact, fewer than 30% of homes for sale in the three San Francisco Bay Area metros remained on the market after two months.

By contrast, about 70% of homes in Long Island and Albany, NY were still on the market. In addition, the only metros outside California that made the 10 fastest moving list were Seattle and Salt Lake City.

America’s Top 10 Fastest-Moving Housing Markets
# U.S. Metro % of homes still for sale after two months, April 2015 % of homes still for sale after two months, April 2014 Difference in share still for sale, 2015 vs 2014 Median Asking Home prices, April 2015
1 San Francisco, CA 26% 28% -3% $1,099,000
2 San Jose, CA 30% 31% -1% $800,000
3 Oakland, CA 30% 31% -1% $598,000
4 San Diego, CA 33% 44% -11% $549,990
5 Orange County, CA 41% 45% -3% $699,000
6 Seattle, WA 42% 45% -3% $409,993
7 Sacramento, CA 42% 45% -3% $396,950
8 Los Angeles, CA 43% 45% -3% $549,000
9 Ventura County, CA 43% 50% -6% $589,999
10 Salt Lake City, UT 45% 28% -6% $299,900
Note: Among the 100 largest U.S. metros. The two-month shares and the difference are rounded to the nearest percentage point, and the difference was calculated before rounding; therefore, the rounded difference might not equal the difference between the rounded shares. Click here to download the full results for each of the 100 largest U.S. metros.

None of the fastest-moving markets have slowed since last year. In fact, the markets on our top 10 list that sped up the most are San Diego, Ventura County, and Salt Lake City. Other markets that are speeding up most rapidly are almost exclusively in the South and Southwest. The share of homes for sale in Cape CoralFort Myers, FL still on the market two months later dropped from 64% in April 2014 to 47% in April 2015. El Paso, TX and Richmond, VA also sped up at a similar pace, even though homes in those markets aren’t moving quickly enough to land them on the 10 fastest-moving markets list.

To illustrate this point, the figure below shows that homes in markets with bigger price increases tend to move faster, though not always. For the most part, these fast-moving metros are sellers’ markets where homes don’t sit very long.

Trulia_FastestMovingMarkets_Scatterplot_Apr2015

Housing Markets Moving Sluggishly in Long Island and Albany, NY

In contrast, the slowest-moving markets are in the Northeast, including Long Island and Albany, and in the South, including Columbia, SC, and Knoxville. All but two of the 10 slowest-moving markets had year-over-year price increases below the 5% national average.

However, even among these snail’s-pace markets, the share of homes still for sale after two months dropped in five of 10 metros. Knoxville and Long Island both all sped up 2 percentage points this year compared with last. It’s true that in six of the metros on this list, the pace of sales slowed in 2015 compared with the year before. The pace of sales slowed the most in Miami (9 points) and Pittsburgh (4 points).

America’s Top 10 Slowest-Moving Housing Markets
# U.S. Metro % of homes still for sale after two months, April 2015 % of homes still for sale after two months, April 2014 Difference in share still for sale, 2015 vs 2014 Median Asking Home prices, April 2015
1 Albany, NY 71% 70% 1% $264,900
2 Long Island, NY 69% 71% -2% $474,995
3 Syracuse, NY 68% 67% 1% $153,000
4 Columbia, SC 67% 69% -1% $170,000
5 Knoxville, TN 67% 69% -2% $184,900
6 Pittsburgh, PA 67% 62% 4% $155,000
7 Lake County –Kenosha County, IL-WI 67% 64% 3% $289,000
8 Virginia BeachNorfolk, VA 65% 65% 0% $249,000
9 Birmingham, AL 65% 66% -1% $193,000
10 Miami, FL 65% 56% 9% $319,000
Note: Among the 100 largest U.S. metros. The two-month shares and the difference are rounded to the nearest percentage point, and the difference was calculated before rounding; therefore, the rounded difference might not equal the difference between the rounded shares. Click here to download the full results for each of the 100 largest U.S. metros.

Why do some markets speed up while others slow down? Last year we found the fastest moving markets were those that had the largest year-over-year price gains. Things don’t appear to have changed this year. In fact, asking prices increased near or above the national average of 5% year-over-year in six of the 10 fastest-moving markets.

But fast-moving markets are different in other ways, too. They tend to be more expensive to begin with. In other words, they have both higher price levels AND they’ve notched bigger price increases in the past year. Expensive markets—including many in California—have tight housing supplies because of limited construction in the face of growing demand. So homes get snapped up quickly.

And this is bad news for first-time homebuyers. The combination of an expensive market and fast-selling homes at the low tier is yet another hurdle for first-timers, who are already getting slammed by declining affordability and slow wage growth. Now, even the homes they might be able to afford seem to be disappearing in the blink of an eye.

MONEY

This One (Missing) Word From Yellen Could Change Your Finances

Federal Reserve Board Chair Janet Yellen
Alex Wong—Getty Images Federal Reserve Board Chair Janet Yellen

How less "patience" could change everything.

The news is in: The Fed dropped “patient” from its most recent statement, and that’s got financial pundits talking. Why is that one word so important?

Well, contrary to the impression you might be getting from the headlines, the Federal Reserve didn’t actually do much of anything today. Instead, the world is excited because the word “patient”—or in this case, the lack thereof—is being read as a coded signal about what the Fed will do some months down the road.

Specifically, everyone wants to know how patient Janet Yellen and her Fed colleagues will be before raising interest rates in the face of mounting positive economic reports. The conventional wisdom said that if the Fed dropped that word from today’s statement, it would mean that a rate hike could come as soon as June. And, indeed, “patient” was conspicuously absent from today’s statement.

Why does that matter to the average Joe? Because an interest rate hike is likely to have wide-reaching effects on your finances—some good, some bad. And even though the Fed won’t raise rates today, the market is likely to respond if it thinks an increase is incoming. So far the market has reacted positively because, while the Fed did remove the patient language, it also appeared more dovish about the economy, and signalled any rate change would be more gradual than previously expected. That said, higher rates are still really a matter of time, and it’s worth thinking about effect that would have.

Here’s what higher rates could mean for you:

  • Bond prices will go down and yields will go up. Higher interest rates mean higher bond yields, and a corresponding drop in bond prices. That’s good for anyone who is about to buy bonds and for those living on savings, who want their investments start throwing off more income. On the other hand, higher interest rates will decrease the value of current bond holdings.
  • The stock market may take a hit. Interest rates near zero have meant easy money for investors, and some argue this has inflated the stock market beyond justifiable levels. A rate hike would signal loose monetary policy is coming to a close, and that could put a chill on equities.
  • Savings and CDs will look better. If more risky investments are hurt by higher rates, the opposite is true with the really safe stuff. Savings accounts and CDs should start giving higher returns, and the difference between a checking and savings account may start to actually matter again.
  • Mortgage rates. Because the federal funds rate affects the price banks can borrow at, higher rates mean it’s more expensive for you to borrow as well. With interest rates near zero, mortgage rates are currently close to a historic low. If the Fed decides it’s feeling less patient, expect buying a home to get more expensive. And if you have an adjustable rate mortgage, you could see the size of your monthly payments start to increase.

One could be forgiven for wondering why the Fed would ever raise rates if it could cause this much turbulence. The truth is the Fed can’t let things run hot forever without causing even more problems. Low interest rates combined with a strong economy is a recipe for inflation.

The Fed also wants to make build up some ammunition to fight future economic battles: If interest rates remain are close to zero, they can’t be easily be lowered to spur a recovery if another crisis comes along. That’s why, ultimately, rates will have to go up at some point, and that will certainly require some getting used to. And when that does happen, patience will be a virtue.

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