Stern Advice - Are first-time homebuyers missing the sweet spot?

WASHINGTON Wed Dec 19, 2012 2:00pm EST

WASHINGTON Dec 19 (Reuters) - Despite reports to the contrary, young adults haven't given up on the American dream of homeownership. They are just biding their time.

As many as 93 percent of millennial-generation renters plan to buy a home someday, according to a recent (albeit self-serving) poll by real estate website Trulia. Yet in today's housing market, characterized by still-subdued prices and record low mortgage rates, only one in three homebuyers are first timers.

Maybe that's because some millennials -- generally those now in their 20s to early 30s -- don't have the jobs that qualify them for mortgages, or because they are taking time to accumulate down payments, or because the ongoing wave of foreclosures has frightened them. Or maybe, as one millennial told me recently, "We just don't know what the steps are, or how to start."

The question is, Will their dallying cause them to miss out on the sweet spot of a promising market? Nationally, home prices do seem to have bottomed. According to the Standard & Poor's Case-Shiller index, prices rose steadily for the six months ending with September, the latest month for which S&P has published data. And mortgage interest rates remain very near all-time lows, with 30-year fixed-rate loans averaging 3.45 percent, according to Bankrate.com.

But that doesn't mean you have to race into a life-changing purchase before you're ready. Rates could stay low for a while. Earlier this month, Federal Reserve Chairman Ben Bernanke said he expects the Fed to hold interest rates low until the unemployment rate falls below 6.5 percent, a threshold the Fed said it doesn't expect to see until sometime in 2015.

Then there are home prices. It is scary to think that while you're trying to amass the funds for a down payment, the price of the house you want is outpacing your efforts. But prices of existing homes rose an average of only 3.4 percent a year between 1987 and 2009, according to the Case-Schiller index. Even as homes grew larger, their prices only slightly outpaced inflation.

Surely, over time, home prices will rise, and they may even rise more quickly than usual as the housing market recovers further. But a year or two of typical inflation shouldn't put your home out of reach.

For example, today's median home price is roughly $184,000, according to the National Association of Realtors. Assuming a 10 percent down payment and using real mortgage quotes from the mortgage comparison site MortgageMarvel.com, that would require about $21,000 in down payment and closing costs, and a monthly payment of $789 for 30 years at 3.25 percent interest.

If that home appreciates 4 percent in a year, it would cost $191,360, and you'd need slightly less than $22,000 in closing costs and a down payment to get into the house. Your monthly payment would be $820. Not quite as cheap, but not insurmountable either.

So if you're one of the 93 percent of renters who would like to buy a home, it's a good time to start moving deliberately toward that goal. Here are some first steps to take.

-- Get, improve and protect your credit score. Buy a copy of your credit score at MyFico.com -- it's the one that mortgage lenders tend to use. If your score is anything less than 740, find out how you can raise it -- paying down a credit card balance, putting more time between you and your last late fee. If your score needs work, monitor it regularly at a free site like CreditKarma.com until it's high enough to make you attractive to a lender.

-- Save, save, save. Buying a house is like having a wedding or a baby - you open the checkbook and start handing out money. Not only will you need to cover a down payment and loan closing items like appraisals and transfer taxes, you may have to buy your own trash cans and curtains and mailboxes and lawnmower and ... you get the point. You can never have too much cash when you're buying a house.

-- Learn about the mortgages available from the Federal Housing Administration. They are popular with first-time homebuyers because they only require a 3.5 percent down payment, but they do carry extra fees.

-- Figure out what you can afford, based on your income and existing debts, including student loans. Online calculators abound, but there's a simple one at the Zillow website. ().

-- Look at lots of houses, and figure out what you care about and what you don't. Go to open houses and new houses and old houses. Write a short list of three to five "must haves" based on whatever is most important to you - a school district or a porch, a family room, walking distance to shopping, or a bedroom-level laundry. Realize that almost anything in a house can be changed except the location, but it costs money.

-- Buy when you're ready. When you've figured out the money and you've figured out what's on your shopping list, start looking with a buyer agent who will represent you in home negotiations. You can find one through the National Association of Exclusive Buyer Agents (). That agent should help you find the right house at the right price and the right time for you.