Buying a house is a big undertaking. The supply of homes for sale is tight in many areas, driving up prices and stress levels. Lenders want a ton of paperwork to verify every aspect of your financial life. And, of course, you have to come up with the down payment — typically 10% to 20% of the sales price.
But buying a house is infinitely easier than it was in our grandparents’ day – maybe too easy in some ways. Here’s a look at how things have changed over the past several decades and the resulting pitfall to avoid, courtesy of financial author Dave Ramsey.
The biggest change in the housing market over the past 60 years is the price. In 1950, the median home price was $7,354, according to the Census Bureau. In 2000, it was $119,600. This year, the median price for existing homes is $232,500, according to data from the National Association of Realtors.
That difference is absolutely stunning when you realize that $7,354 price equals $44,600 in 2016 dollars. That means the median price has increased $188,000 in 66 years.
Why? One reason is size. The average home size in 1950 was less than 1,000 square feet with two bedrooms and one bath. Closets were few and small and the lots were often the size of a postage stamp. By 1950, the average size had grown to 1,500 square feet with the addition of a third bedroom and a half-bath. Since then, things have gone really crazy. Today the average new home is 2,500 square feet with two stories, three bedrooms and two or more bathrooms. Walk-in closets, media rooms, and home offices abound in new homes. Interestingly, homes are getting bigger as families get smaller, shrinking from an average 3.37 members in 1950 to 2.54 in 2015.
Another explanation for soaring average homes prices is schools. The disparity in quality between school systems (and individual schools) often allows sellers in top- notch districts to get a significant premium in the sale price, thus driving up the average for all homes.
Americans can afford today’s mini-mansions thanks to changes in the home lending system. In the 1930’s mortgages were limited to 50% of the sale price and had five or ten-year terms. That began to change after World War II and by the 1950’s 30-year mortgages for up to 95% of the purchase price were common. Of course, the lending industry got more creative over the decades, coming up with adjustable rates and other methods to allow more people to qualify for home ownership. It went a bit too far in the first part of the 21st century, setting the stage for the 2008 housing collapse.
All this history boils down to this: houses are bigger, and money is easier – and that’s a doubled edged sword. Think carefully when shopping for a home. How big a home do you really need? How much are you willing to pay for status? The pleasure of having rooms you rarely use or a trendy address will quickly be offset by the burden of a too-big mortgage. And remember, you don’t have to spend every dollar the bank is willing to lend you. It’s in the lender’s best interest – not yours — to hook you for as much as possible.
Homeownership is a big part of the American dream. Just choose wisely so your dream house doesn’t become an onerous nightmare.