We research all brands listed and may earn a fee from our partners. Research and financial considerations may influence how brands are displayed. Not all brands are included. Learn more.

How to Navigate a High-Cost Housing Market
Francesco Ciccolella for Money

Rising home prices are forcing buyers to get creative.

Just take recent homebuyers Zac Alfson and his husband, Bryan Henley. They were set on buying a house in downtown Orlando last fall — one with a guest room, a dedicated home office and plenty of storage space. Being near bike trails was also a priority for Henley, who’s a busy ICU nurse and avid cyclist.

When it was clear the couple wouldn’t find a picture-perfect place within their price range — at least downtown, they settled for a fixer-upper instead. They’re now proud residents of the Rock Lake neighborhood, just a mile from Orlando’s center.

Since moving in October, the pair has already made adjustments to the floorplan. Next up are renovations to both bathrooms, insulation updates, roof repairs and some much-needed landscaping.

“It allowed us to get a great house at a lower price,” said Alfson, who serves as the executive director of the Orlando Milk District, an arts and entertainment hub just outside of downtown.

It’s been work, but Alfson said he and Henley are “very happy” with their decision. “There are more home projects than we were planning on, but nothing that we can't handle,” he said. “We love the neighborhood that we’re in.”

If current trends continue, Alfson and Henley’s story is one we’ll hear more of this year. According to a new report, national house prices increased 8.2% between November 2019 and November 2020. It was the highest year-over-year jump since early 2014.

But that’s just the national number. In some individual states, prices rose even more. In Idaho and Maine, for example, they jumped a whopping 16% over 2019. In Indiana, Montana and Arizona, it was 13% to 14%. Florida, where Alfson and Henley bought, has seen a 7.1% uptick since 2019.

Unfortunately, it seems 2021 prices will follow in similar footsteps, albeit at a slower pace. According to a forecast from Realtor.com, prices will jump another 5.7% by years’ end — putting even more strain on already struggling homebuyers.

Are you worried about rising prices hurting your chances at homeownership this year? According to experts, you still have options.

1. Consider a townhouse or condo.

It might be nice to find that forever home and only go through the homebuying process once. But if you’re on a tight budget, considering a smaller, starter-style home like a townhome or condo might be a smart move

“While it may not have all the amenities of a dream home or the perfect location, a starter home that you can comfortably remain in for a few years is typically less expensive and doesn’t require as many years to save up for a down payment,” said Ann Thompson, retail sales executive for Bank of America.

It’s true: According to the National Association of Realtors, the average condo or co-op home clocked in at $271,700 in the third quarter of 2020. Single-family homes? They averaged $313,500 — nearly $42,000 more. If you were using a conventional mortgage loan, which requires at least a 3% down payment, you’d need a minimum $9,405 down payment for the single-family house and an $8,151 one for a condo. If you went up to a 20% down payment, you’d need to save $8,000 less for an average-priced condo.

“Single-family homes are a seller's advantage now,” said Craig Studnicky, president of real estate firm RelatedISG. “The best alternatives for first-time homebuyers are condos now. Condos were slightly overbuilt in the past building cycle, providing a larger supply and a good buying opportunity.”

2. Head to a more rural area.

In many cases, adjusting where you’d consider buying can help, too.

As Danielle Samalin, CEO of homebuying education platform Framework Homeownership, explained: “Where your house is located often has a bigger impact on the cost than what your house has in terms of size, condition or amenities.”

According to a report from the National Association of Home Builders, prices in rural areas are 33% lower than in metropolitan areas, which include big cities and their surrounding suburbs.

Once you get out of major metro markets, there’s another benefit: USDA loan eligibility. In many more rural areas — defined by the U.S. Department of Agriculture as places with fewer than 50,000 residents — homebuyers can use a government-backed USDA loan to purchase a property. These loans require zero down payment and come with low interest rates.

“If a permanent virtual workplace is in your future, you no longer have to live close to where you work,” Samalin said. “That opens up lots of affordable opportunities in lower-cost communities all over the country.”

3. Buy with someone else.

Bringing in a co-buyer is another option — especially if you know someone actively looking for a house themselves.

As Tendayi Kapfidze, chief economist at loan marketplace LendingTree, put it: “Consider partnering up with a trusted friend or family member. They may be feeling priced out, and you just might be each other’s solution.”

A nice benefit of co-buying is that you can apply for the mortgage loan together, allowing you to combine incomes, often qualifying for a larger loan and better terms.

Don’t know anyone looking to buy a house? Tapping loved ones for financial help could also move the needle. If they’re in a good financial position, they might be able to offer funds for your closing costs, down payment or other expenses.

Just make sure it’s not a loan. In order to use gift funds toward a home purchase, most mortgage lenders require a letter stating the money’s a gift — not something that needs to be repaid over time.

4. Get a better mortgage rate.

The lower your interest rate is, the more your homebuying budget grows. So getting a lower mortgage rate? That’s one of the best things you can do in a rising-price environment.

Let’s look at an example: Say you can afford a monthly mortgage payment of no more than $1,000. If you were able to secure today’s average rate of 2.65%, you could take out a loan as big as $248,000 and still stay on-budget. If your rate came in at 3.65%, you could only take out $218,000 — a full $30,000 less.

Put simply: Your rate makes a big difference in what you can afford to buy. Fortunately, mortgage rates are at their lowest point on record right now.

“Some of my clients who started their search last year have noticed that their purchasing power has actually increased,” said Dana Bull, a real estate agent with Sagan Harborside Sotheby's International Realty in Marblehead, Mass. “The favorable rates have allowed them to stretch their budget and still be in a position to buy despite slight increases in home values.”

Bull’s clients were lucky, though. While mortgage rates are currently at record lows, not everyone will qualify for them. To make sure you’re getting the best rate, work on improving your credit score before applying for a loan. Higher credit scores — think 740 or higher — typically receive the best rates. Shopping around for the mortgage lender offering the lowest rate can also help.

“Don’t settle on the first rate — or even the first lender that you find,” said Sarah Pierce, head of operations at mortgage lender Better.com. “Look around to make sure you get the best interest rate out there.”

5. Find out if you qualify for a down payment or mortgage assistance program.

Depending on your income and where you’re buying a home, there may be programs that can help offset — or even fully cover — your down payment or closing costs, making it easier to afford a home despite rising prices.

Some of these are offered as low- or no-interest loans (many of which are forgivable if you live in the home long enough), while others are grants and won’t need to be repaid.

To see what options you might be available, check with your local housing agency. You can also use the Department of Housing and Urban Development’s state-by-state guide, and sites like Down Payment Resource can help as well. Working with a free HUD-certified housing counselor is another option.

“Look into your state's housing finance agencies programs,” Samalin said. “As homes get more expensive and it becomes increasingly difficult to save money, many state and local governments and nonprofits offer down payment assistance programs to help.”

6. Buy a place that needs some work.

Fancy yourself the handy type? Just like a good episode of “Fixer Upper?” Buying a home that needs some TLC — like Alfson and Henley did — may be a good way to stay on-budget.

This could mean buying a foreclosed property or just a home that’s older and in need of some repairs. According to data from foreclosure marketplace Auction.com, foreclosures are currently selling for about 86% of their market value. On a home worth $200,000, that’d mean saving about $28,000.

Savings aside, there’s room to build wealth, too. Once you’ve completed renovations on the house, you can sell the place for a profit. As long as you live in the property at least two years, you’ll be exempt from capital gains taxes on the sale. Casanova Brooks, a real estate agent with eXp Realty in Omaha, Neb., calls this a “live-in flip.” You can use the proceeds for a new property — potentially one that’s nicer, larger or in a more desirable location (or maybe even that forever home?).

“You buy it at a discounted rate, and you make the repairs and updates needed while you live in it for one to two years,” Brooks said. “You might enjoy the process so much that you immediately repeat with your next home.”

Buying a house isn’t out of reach

If buying a home is a goal for 2021, rising prices don’t have to slow you down.

Work on securing a low interest rate to expand your buying budget, look into mortgage and down payment assistance programs, and be thoughtful about where and what type of home you purchase. If all else fails, co-buying with a friend or family member can be a smart way to buy a house without breaking the bank — or compromising too much on your property.

As Bull put it, in today’s rising-price market, “You may have to get creative to make homeownership a reality.”

More from Money:

The Home Buyer's Dilemma: As Mortgage Rates Fall, House Prices Soar out of Reach

Finding a Home Is so Hard Right Now That Buyers Are Scouring Obituaries and Divorce Notices

2021 Real Estate Predictions: How Vaccines, President Biden and More Could Shape Housing Trends