Amid cooling inflation and rising housing costs, many first-time homebuyers feel more certain about their financial situations, according to a recent study from TD Bank, America's Most Convenient Bank®.  TD's First-Time Homebuyer Pulse found that 54% of respondents indicate they are now better off financially than they were two years ago. And while buyers' perception of the economy and affordability continue to draw concern, rising rent may be driving homeownership interest.

TD Bank surveyed 1,007 Americans planning to buy their first home in 2023 to learn more about their path to purchasing a home, as well as their thoughts on preparedness for the process as housing costs fluctuate nationwide.

First-Time Homebuyers Maintain Optimistic Outlook, Amid Market Concerns

Among those looking to purchase a home for the first time in 2023, 39% believe now is a good time to buy. Many who have begun their process are also showing signs of preparedness with 48% starting to save for a down payment. Additionally, more than eight in ten (85%) respondents indicated buying a home was a good long-term investment.

Though first-time buyers are looking more optimistically toward the homebuying season, reservations remain, with a majority (69%) concerned about the economy and 64% concerned about their ability to afford a home with rising interest rates.  That worry persists for six in ten respondents when considering the ability to afford a home combined with other expenses.

"Although typically overlooked when beginning the search for a home, meeting with a lender can help first-time buyers better understand the additional costs and opportunities associated with homeownership," said Steve Kaminski, Head of U.S. Residential Lending at TD Bank. "Against the backdrop of higher rates, continued inflation, and low housing inventory, it is especially important for consumers to speak with mortgage professionals and realtors early in the process to create a well-adjusted budget and identify a comfortable price range for their homebuying search, better positioning them to compete and make an offer on the home that meets their unique goals."

Rate hikes have also fueled some good financial habits, including the 43% of participants who cited that they have started monitoring their credit report or taken steps to improve their credit score to potentially reduce interest rates for their home loans. Additionally, 48% have established a homeownership budget for their first-time home purchase this year.

Rising Rent Costs Push Homebuying Interest

As you may expect, nearly two in five (38%) renters have considered delaying their home purchase and continuing to rent in 2023. Among them, 30% said the top reason for potentially delaying their homebuying plans is an inability to afford the home they want due to rising interest rates.

Interestingly, many have had the opposite reaction, seeing rising rent costs as a stimulus to forge ahead with purchasing a home. Of those survey participants who have not considered delaying their home purchase, 40% cited rising rent prices as the top reason prompting them to move forward with buying a home.

"Even as rates have risen in comparison to the historically low-interest rate environment many experienced in the past two years, buyers see the importance of building equity in a home purchase," said Kaminski. "Homeownership has and continues to be a sustainable way to build intergenerational wealth, while providing the added benefit of shoring up a buyers' financial position over the long-term." 

Buyers Make Lemonade Out of the Big Lemon – Rising Rates

While inflation and rising rates are two factors first-time homebuyers can't control, some are rethinking their approach to provide some flexibility in the home buying process. In fact, 59% of those looking to purchase a home this year indicate they want to pursue a fixer-upper or starter home.   

More than one-third (34%) of those who plan to buy a fixer-upper or starter home are seeking a more affordable home. More than half (52%) of those planning to buy a fixer-upper or starter home cited that current market conditions impacted their decision. 

Homebuyers aren't just getting creative with the type of home they're looking to purchase. They're also coming up with long-term solutions to combat the current rate environment. More than one-fourth (27%) plan to refinance when interest rates come down.

"Depending on a buyer's personal financial situation, how long they expect to be in the home and other risk-based considerations, there may be alternate mortgage options to consider in the near- and long-term when it comes to financing a home," said Kaminski. "But it's always important to talk through those options to weigh the benefits and risks with a mortgage professional early in the process."

That sound advice continues to only motivate a small portion of first-time homebuyers, with just 22% starting the process of speaking with a mortgage lender.