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Stretching budgets for a dream house

Home prices across the U.S. have spiked 40% since the pandemic, according to data from J.P. Morgan. A tight inventory and higher interest rates are adding additional pressures to this ongoing affordability crisis.

Some American families have reacted to this crisis by delaying, or even abandoning, their plans to buy a home. A survey conducted by The Harris Poll found that 61% of renters were worried they would never be able to purchase a home.

However, other families have reacted to this crisis by stretching themselves thin and overleveraging. In 2022, more than 42 million households were “cost-burdened” — meaning they spent more than a third of their income on housing, according to Harvard’s Joint Center for Housing Studies.

Ronnie could be at risk of becoming part of that latter cohort due to his reluctance to use his $83,000 down payment nest egg to pay off the family’s $17,000 in combined debt. Because he’s so set on buying a house (as opposed to a more affordable condo or townhouse), he’s losing sight of his priorities. As Kamel reminded him, the houses in Denver can range from $700,000 to upwards of $4 million.

Ronnie claimed he was holding onto these balances to preserve his credit score, but Kamel wasn’t convinced. “Credit scores are one of the dumbest things on planet earth,” he said.

He offered a better, and financially safer, path to homeownership.

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Practicing patience

At the end of 2023, the average credit card interest rate was 21.47%, according to the Federal Reserve. Getting rid of this pile of debt could significantly improve Ronnie’s financial position. Paying off his wife’s auto loan would further bolster their family’s security.

Kamel estimated that Ronnie could pay the $17,000 for debt repayments with the $83,000 in their savings account and set aside roughly $25,000 as an emergency fund for monthly rent payments and groceries. The rest of that balance — $41,000 — could then be deployed into a high-yield savings account. As Kamel pointed out, some of these high-yield accounts offer interest rates at 4% or 5%.

“You’re struggling with patience,” Coleman told Ronnie. “Welcome to the party, man… it is what it is. It’s worth waiting on. I think you need a perspective change.”

Saving and compounding his wealth this way could help Ronnie build up a larger down payment and eventually get his family into the housing market — preferably in a less expensive city or state. This patient approach could significantly lower the financial risks of buying a home for Ronnie and his wife.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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