First Time Home Buyers are not Buying

First Time Home Buyers are not Buying

First Time Home Buyers are not Buying If it’s such a great time to buy a house why are young Americans opting to rent rather than a buy a house? Is it because of low inventory in their price range, tight credit, difficulty qualifying, or all of the above?

First-time home buyers aren’t clueless. They’ve done the math on how much house you get for the cost of buying. Bottom line for many is that per square foot, buying a house can be too expensive.

As of October 2014 only 33% of home sales were to this unique demographic. To me the first timers are the “canary in the coal mine” when it comes to the short-term prospects for home prices.

The current percentage of sales to first-timers fell from 38 percent a year ago, according to an annual survey of homebuyers by the National Association of Realtors (NAR). The long-term average, dating back to 1981, shows that 40% of house purchases are by first-time buyers.

Right now a big obstacle to buying a home is the nearly 20% down payment that’s required to qualify for a home mortgage. Even on a $250,000 house that requires $50,000 to begin the qualifying process.

Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” said Lawrence Yun, chief economist of the NAR.

“Adding more bumps in the road 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” Yun added.

Besides the obstacles of affordability many potential buyers still remember the huge hit the housing market experienced during the last big downturn in 2007-2009. In many regions of the country home prices have yet to fully recover.

Thanks to low interest rates along with loose monetary policies the average house price has rebounded high enough to cause “stick shock” to a first-time buyer.

Nearly half of those surveyed by the NAR said the mortgage application and approval process was much more or somewhat more difficult than expected. Even refinancing of existing mortgages is a headache.

A recent decision modifying regulations for mortgage lenders could help ease credit standards to a degree, but lending isn’t returning to the loose days of the last housing boom.

The NAR results were based on replies from nearly 6,600 primary home buyers in July. Since the financial crisis the NAR has also kept track of factors that first timers have had to contend with.

One economic reality since the recession began in 2008 is that wages have been virtually unchanged, growing by a paltry 0.5% in the past 6 years. Home prices, in stark contrast, have zoomed by up to 50% higher in some markets.

The Millennial generation watched what happened to the value of their parents’ houses, concluding that it is safer to rent than to buy. As property managers know, it’s usually cheaper as well.

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Information provided by Aimee Miller, VP of Marketing at AppFolio

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