Should You Stretch Your Finances to Buy a Home?
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Here's your money briefing for Friday, May 28th. I'm J.R. Whalen for The Wall Street Journal. The cost of buying a new home is soaring, with many buyers getting into bidding wars. And that's leaving a lot of people with a tough choice. Should they max out their budget or even go over budget to close on a mortgage? So is it worth taking the plunge?
a young home buyer is supposed to stretch to buy that home at these historically low rates on the grounds that their income will go up over time and that they will grow into that payment very, very comfortably.
Or is that too risky?
And if we say that lending, stretching to lend is okay for individuals, then that's a short step away from saying lending to stretch is good for everyone. And that's exactly how credit bubbles fuel housing bubbles.
Coming up, we'll examine both sides of the issue with a pair of experts who've looked into this and come away with very different answers. That's after the break.
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What housing market challenge is forcing buyers to stretch their budgets?
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These can be frustrating times for prospective homebuyers, and especially young adults looking to buy their first home. Rising prices mean many will be forced to stretch their personal finances to submit a winning bid. But in this market, should they? Let's hear from both sides of the issue. We're joined now by Lori Goodman. She's Vice President for Housing Finance Policy and the founder of the Housing Finance Policy Center at the Urban Institute. Lori, thanks for being with us.
Thank you very much for having me here today.
And Susan Wachter is a professor of real estate and finance at the University of Pennsylvania's Wharton School and from the Penn Institute for Urban Research. Susan, thank you for coming on the show. Thank you for having me. So, Lori, I want to start with you. You feel that the time is right for millennials to buy a home, even if they have to stretch themselves financially. But young adults, just by virtue of where they are in their career... have limited funds, and many are carrying a lot of debt. So wouldn't it defy logic to buy a home in a seller's market where prices are rising at the fastest rate in 15 years?
That's a very good question. And, you know, I think basically what buying does for you is it locks your housing costs. And it locks your housing costs at historically low interest rates. And what that means is that, you know, you rent and the rental prices go up year after year. If you're young, chances are your income is rising. So you're locking your housing costs. And if you're stretching to buy now, as your income goes up over time... that will feel much, much more comfortable. And yes, prices have gone up a lot, but I don't think they're going down because housing is in such short supply. Meanwhile, you have locked rates at just historically low interest rates.
Now, Susan, you say millennials shouldn't stretch themselves and venture into the housing market now, but most young adults being renters, wouldn't it be better for them to look into a monthly payment and a mortgage rather than see their monthly rent potentially rise with inflation?
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