If interest rates remain low and the job market is improving, corporate profits are skyrocketing, and politicians scramble to garner votes this week, where in the world are first time home buyers, one key component of a housing market recovery?
A new report from the National Association of Realtors is slightly unnerving, as it indicates the share of first time buyers has fallen to its lowest point in nearly three decades, dipping 5.0 percentage points from a year ago to 33 percent. The good news from the survey, however, indicates that what we all believe to be true is fact: the overwhelming majority of buyers search for homes online and then purchase their home through a real estate agent.
Where have all of the first timers gone?
Dr. Lawrence Yun, NAR chief economist, says there are many obstacles young adults are enduring on their path to homeownership. “Rising rents and repaying student loan debt makes saving for a downpayment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” he said.
“Adding more bumps in the road,” Dr. Yun continues, “is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums.”
Dr. Yun adds, “Stronger job growth should eventually support higher wages, but nearly half (47 percent) of first-time buyers in this year’s survey (43 percent in 2013) said the mortgage application and approval process was much more or somewhat more difficult than expected. Less stringent credit standards and mortgage insurance premiums commensurate with current buyer risk profiles are needed to boost first-time buyer participation, especially with interest rates likely rising in upcoming years.”
Who are these first time buyers? How did they save and buy?
The median age of first-time buyers was 31, the same as it has been for the past two years. Their median income rose from $67,400 in 2013 to $68,300 in 2014.
While repeat buyers purchased a median 2,030 square foot home for $240,000, first time buyers this year typically bought a 1,570 square foot home costing $169,000. The number one reason for their purchase was a desire to own their own home.
The median down payment for first time buyers is six percent, and among the 23 percent of first time buyers who said saving for that chunk of cash was difficult, more than have said student loans delayed their saving (up three percent from 54 percent least year). Aside from their own savings, 26 percent of first time buyers received a gift from a friend or family, and six percent took a loan from these same folks. Fully 10 percent actually tapped into their 401(k) or sold stocks and bonds
The overwhelming majority of first time buyers opted for a fixed-rate mortgage (93 percent), and one in three financed their home with a FHA-backed mortgage. One in ten used the Veterans Affairs (VA) loan program with no down payment requirements.
“FHA premiums are too high in relation to default rates and have likely dissuaded some prospective first-time buyers from entering the market,” says Dr. Yun. “To put it in perspective, 56 percent of first-time buyers used a FHA loan in 2010. The current high mortgage insurance added to their monthly payment is likely causing some young adults to forgo taking out a loan.”