Fewer first-home buyers are coming into the market, despite
favorable home prices and mortgage interest rates that would
normally encourage young people to become homebuyers.
Only 34 percent of existing homes sales in July were to
first-time buyers, according to the National Association of
Realtors (NAR), up from 32 percent in June and the same figure in
July 2011. By comparison, the NAR says that first time buyers
usually account for four out of every 10 sales in more typical
Affordability not enough
This is at a time when housing affordability - a measure based
on home prices, mortgage rates and personal incomes - remains near
all-time highs. But several factors appear to be converging to
discourage potential homebuyers from entering the market.
The first is more stringent down payment requirements. These
days, most lenders are looking for at least 10 percent down on a
conventional loan, unlike the days before the crash when
no-money-down mortgages were common. Most young people just don't
have that much cash on hand. FHA mortgages still require only 3.5
percent down, but the higher fees associated with those loans are a
turn-off for many potential buyers.
Inventory surprisingly limited
Another is a limited inventory. Although it seems
counterintuitive, with the large number of foreclosures coming on
the market, the supply of entry-level homes available for sale is
actually fairly low, according to the NAR and other firms tracking
the housing market.
"There are notable shortages in the lower price ranges which are
limiting opportunities for first-time buyers," said Edward Yun, NAR
chief economist. "The low price ranges also are popular with
investors, so entry-level buyers are at a disadvantage because many
investors are making all-cash offers."
All-cash sales, most of which are to investors, made up 27
percent of all existing home purchases in July, down slightly from
29 percent in June and in July 2011.
Underwater homeowners not selling
Another factor is that fewer entry level homes are coming on the
market, due to their owners being "underwater" on their mortgages.
Many owners of entry level homes might like to sell, but are unable
to because they owe more on their mortgage than their home is
worth. Selling would require that they come up with the money to
cover the difference. So they just sit tight until they can pay
down their loan balance or until home values rise enough to put
them back in positive equity.
Although bank-owned foreclosed properties (called real estate
owned, or REOs) are a possibility, those may not be located in
neighborhoods first-time buyers are interested in, and often are
not in move-in condition, requiring significant work and expense to
get them in shape.
Shifting job market encourages renting
Finally, the changing job market is also a factor. Even without
taking unemployment levels into account, today's worker is less
likely to stay in the same job for an extended period of time, an
issue that has a significant impact on homebuying decisions.
Homebuying is much less attractive if you're not going to anchored
in an area for a number of years.
At the same time, the decline in first-time homebuyers has
pushed up demand for rental properties, so that rents are
increasing as well. The trend suggests that at some point rents
will reach a point where buying a home becomes more attractive
again and the rate of first-time buyers will increase. When that
might happen, though, is far from clear.
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