When D.R. Horton recently announced a new brand of bargain homes as a way to lure more first-time buyers, it underscored how important these buyers are to the overall housing market — and how difficult it has been to land them.
D.R. Horton's (DHI) Express Homes brand offers properties at $120,000 to $150,000. That's well below the national median price of a new house, which the Census Bureau said was $275,800 in April.
The program is part of the company's strategy to capture a first-time buyer's market that CEO Donald Tomnitz said will drive the next leg of the U.S. housing recovery.
Many industry observers reckon that the next leg of the housing recovery will be severely limited unless builders and real estate agents figure out a way to draw more entry-level buyers into the fold.
These buyers play a crucial role in the success of other segments of the housing market. When plenty of first-timers are in the market, move-up customers can sell their homes. That in turn creates more activity at the higher end of the market.
"The importance of first-time buyers is that they start a chain reaction," said Lawrence Yun, chief economist at the National Association of Realtors. "They get in the market and help other buyers sell their homes.
Many would-be first-time buyers are still having a hard time getting into the market, however. They made up only 29% of all U.S. buyers in April, according to data from the NAR. It was down from 30% in March and flat with a year earlier.
A House Takes Money
Historically, first-timers have made up about 40% of the total, says analyst Jay McCanless, who follows builders for Sterne Agee.
"One of the things we watch is the percentage of first-time home buyers, and that percentage has been staying right at 28% to 30%," McCanless said. "We haven't seen it move off that number in 12 months. It should range from 40% to 45% in a healthy market.
The reasons why there aren't more first-time buyers in the market have been well documented. Many are younger people who are strapped with heavy student loan debt, have been hurt by the sluggish job market, haven't been able to save up enough money for a down payment or can't get approved for loans in the current tight lending environment.
"The biggest obstacle is saving enough for a down payment," said Jed Kolko, chief economist at property website Trulia (TRLA). "Although job prospects have gotten better for young people in the past year, it still takes years to save for a down payment.
During the first quarter, the homeownership rate of Americans under 35 was 36.2%, the Census Bureau said. That's down from a peak of more than 43% in 2004 and 2005, and represents the lowest level since such data began being tracked in the early 1980s.
McCanless says the top hindrance for first-time buyers is that lenders "aren't willing to take a significant amount of risk on those buyers.
That's partly because many lenders remain gun-shy about approving loans to applicants with less-than-stellar credit ratings, particularly after so many lenders got clobbered by defaults and foreclosures during the housing crisis.
However, according to recent remarks by Mel Watt, director of the Federal Housing Finance Agency, the FHFA will direct government-sponsored housing finance enterprises Fannie Mae (FNMA) and Freddie Mac (FMCC) to add more liquidity to the market, partly by easing lending standards so more people can get mortgages.
"It's a welcome statement, given that Fannie and Freddie are turning large profits," Yun said. "Their role should not to be to maximize profit. Some dialing down of standards is welcome.
He says if lenders return to "normal underwriting standards" from before the last decade's housing boom and bust it would give a "10% to 15% boost" to home sales "and many would be first-time buyers.
This would be welcome news for builders that offer homes for first-time buyers, such as D.R. Horton, Lennar (LEN), PulteGroup (PHM) and Meritage Homes (MTH).
Condos For First-Timers?
One potentially positive development in the news recently on the first-time buyer front is what's happening with condominium sales.
The NAR reported that sales of existing condos and co-ops rose 7.3% in April from a month earlier. That compares with just a 0.5% rise in single-family existing home sales.
The reason why this rise is encouraging is that many first-time buyers purchase condos before moving up to single-family homes.
Not everyone is ready to view this as a sign of an improving market for first-time buyers, however.
"It's too early to say," Yun said. "In the past month, we have seen more activity in terms of better strength in the condo market vs. the single-family market. But it's hard to gauge for sure whether this implies a trend or just a normal balancing of the data. You can't directly relate it to the first-time buyers market.
Trulia's Kolko notes that the market for condos often attracts foreign buyers, particularly in large urban areas, as well as people trading down from bigger homes.
"It is not always first-time homebuyers behind that demand for condos," he said.
One thing that would boost the market for first-time buyers is an effort on the part of more builders to build affordable homes. That's not happening yet on a large scale.
"The new homes being built appear to be more in the pricey range," Yun said. "They are catering more toward wealthier buyers rather than first-time buyers.
One exception is D.R. Horton, with its Express Homes brand, concentrated in Texas, Florida and Georgia. The brand is being rolled out this year, with an aggressive expansion plan earmarked for 2015.
"That is a portion of the market D.R. Horton has historically done well in. They know how to build a home to appeal to that buyer," McCanless said.
"We haven't seen any other builders making any demonstrative moves to serve first-time buyers," he added. "There still isn't much being built to serve the lower end of the price market."
- Real Estate
- D.R. Horton