First-Time Homebuyers Skittish on Ideal Market

by Chicago Agent

First-time homebuyers are steering clear of the housing market in recent months.

Only 65.1 percent of U.S. households own homes, which is the lowest amount since 1996. A big reason for that decline, according to a new piece by the Associated Press (AP), is the relative absence of first-time homebuyers, a longtime lynchpin of a healthy housing market that has been constrained by market forces.

Typically, the AP reports, first-time homebuyers make up half of all home sales, but since the housing boom – a time when 2.8 million first-timers bought homes – they have only made up a third of purchases.

The biggest factor, unexpectedly, is the shaky U.S. economy, and the weak job security, tough credit rules, and lack of cash for down payments.

Dan McCue, a research manager at Harvard University’s Joint Center for Housing Studies, said that the jobless rate among 25 to 34 year olds (the typical age of first-timers) is 9.8 percent.

“The obstacles facing first-time buyers are big, and it’s changing the way they look at home ownership,” McCue says. “It’s no longer the American Dream for the younger generation.”

Financing is also playing a huge part. As opposed to 2002, when median down payments were only 4 percent, Zillow reports that average down payments are now 22 percent, and the AP story reports that minimum credit score requirements are so high that only one-third of households can even qualify for a mortgage.

Falling inventories pose yet another obstacle. Fearful of falling prices, many sellers have taken their prime properties off the market, and the resulting housing inventory – the lowest since 2007 – is often lacking in what firs-time homebuyers want, as Seth Herter, a 23-year-old store manager in St. Louis, told the AP.

“I’ve looked for a home, but the places we can afford with the money we have are not that great,” Herter said. “It also doesn’t seem smart anymore to buy with prices falling. Buying a home just doesn’t make sense to us.”

Mark Vitner, a senior economist at Wells Fargo, thinks that when prices begin to increase, first-time homebuyers will be more apt to enter market; that, or they need to be adequately shown how affordable homes are in today’s market.

As we’ve reported before, housing in the last two quarters has entered an extraordinary period of affordability. Prices are at their lowest level since 2003, according to the latest Case-Shiller 20-City Composite; interest rates, especially in the wake of the Federal Reserve’s “Operation Twist” financial stimulus program, have been at historic lows, with the most recent data from Freddie Mac putting the average 30-year fixed-rate mortgage at an incredible 4 percent; and the latest affordability index from the National Association of Home Builders read that 72.9 percent of all U.S. homes are affordable to families earning the national median income of $64,000, an increase from the 72.6 percent in the second quarter and  11th consecutive quarter that the index was higher than 70 percent.

Homes are so affordable, even, that it is cheaper to buy a property and pay a monthly mortgage than rent in many major cities. A recent Marcus & Millichap study, based on mortgage data for 30-year FRMs at a 4.5 percent rate, put Chicago’s average monthly mortgage at just $1,002, compared to an average monthly rent of $1,062.

So while values may be slippery and confidence low, it’s a prime time to purchase a home; maybe first-time homebuyers just need a proper reminder.

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  • The down-payment, as well as a lack of information about the extreme values that are available in today’s marketplace seem to be the biggest hurdles to would-be new home buyers. Also, many of those values come in the form of short-sales, and many people don’t have the patience (or circumstances) to wait for the process to unfold.

  • Lyn Sims says:

    I think the better values for buyers in the Northwest Suburbs are with foreclosures. Some are in good condition, others aren’t. Better know which end of a hammer to use if you’re a first time buyer. Some short sales that I’ve seen are in worse condition than a foreclosure. Who cares what the price is because the hassle with the bank is not worth the buyers time. Finally buyers are getting it.

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