Investors, move-up buyers and retirees are shopping for homes again, but many first timers are warming the bench.
America's housing market has seen dramatic improvements this year; properties are selling, foreclosures are falling and prices are rising. Still, novice buyers aren't making the cut. Tight credit, investor competition, high down payments and college debt are all obstacles for today's real estate rookies.
Is our nascent real estate comeback sustainable without fresh blood? It depends whom you ask. National Association of Realtors Chief Economist Lawrence Yun calls the recovery "abnormal.
"We want a more normal recovery process," said Yun, meaning one with more first-time buyers. In an NAR survey, first timers represented only 28% of buyers in May vs. 34% a year earlier and vs. more historically normal levels above 40%.
Some soothsayers see recovery with or without first timers.
"Whether first-timers can buy is more important to first timers than the overall housing recovery," said Jed Kolko, chief economist with home website Trulia (TRLA). "Prices have been rising, even without more first-time buyers.
Homes On The Market?
In May, home prices rose 12.2% from a year ago, the biggest change in seven years, says real estate analytics provider CoreLogic (CLGX).
While prices recover, supply is low. Some would-be sellers simply want more price appreciation before putting their homes on the market. Others can't sell yet, as they owe more on their mortgages than their homes are worth — the underwater effect.
"Supply has been constrained even though existing owners would love to sell," said John Hussman, at Hussman Econometrics Advisors.
The new-home supply is rising as builders get back to work. But rising home prices and now interest rates make buying tough for first timers.
This month the average rate on a 30-year fixed mortgage hit 4.51%, a two-year high, according to Freddie Mac. It dipped to 4.37% this week.
Another obstacle for first timers, who are typically buying lower-priced homes, is competition. Investors, many using all cash, can snap up low-end properties — foreclosures and fixer-uppers — because they can offer sellers a faster, less-complex and more certain closing.
"First-timers can't compete," said Andrew LePage, an analyst with DataQuick. "If you push out a large block of buyers (the first timers), then it limits the recovery.
Cash investors are at an all-time high, according to LePage. He says in May 31.6% of California buyers paid cash, with February the highest ever in DataQuick record-keeping at 36.5%. LePage says this is more than double earlier rates. For instance, in 1988 California's monthly cash buyer average was 16.2%.
Credit, Jobs And School Debt
Many newbie homebuyers turn to the Federal Housing Administration for loans, but lending standards in that arena have tightened. "Overall lending remains tight," Kolko said. "The FHA recently increased its insurance premiums, making it more expensive to get a very-low-down-payment loan.
The biggest challenge for first timers is "obtaining enough for a down payment," said Fred Ehle, vice president of brand marketing with homebuilder PulteGroup (PHM).
Standards for non-FHA loans may get tighter. "If the new QRM (qualified residential mortgage) rules go into effect, (requiring) down payments of 10% or 20%, then this would have a devastating effect on first-time buyers," Yun said.
The QRM rules come from the Dodd-Frank finance law; those proposed down payment levels would be for loans backed by Fannie Mae (FNMA) or Freddie Mac (FMCC).
A raft of complicating factors affects newbie buyers too.
"First-time homebuyers tend to be young, and younger people had a worse recession than older people," Kolko said. "In the recession, homeownership fell for young adults. They doubled up with roommates or lived with their parents.
Many young adults who couldn't find work went back to school for advanced degrees, amassing debt.
"Many young people are saddled with large student debt," said Yun. "The job market is improving, but it's still hard for them to get jobs that match their degrees.
The interest rate on student loans just doubled, and that's a political football in play. The Senate on Thursday reportedly reached a deal to curb the increase, with the goal of getting legislation through Congress before its August recess.
Young Americans want to buy homes and build equity, say builders. First-time buyers "have experienced multiple years of significant rent increases, and the scale has tipped for many apartment dwellers in favor of purchasing a home," said PulteGroup's Ehle.
Pulte's Centex brand is aimed at the first-time buyer market. It accounted for 31% of Pulte closings in 2012, down from 36% in 2011.
Builder Ryland Group (RYL) estimates 25% of its sales are first timers, and they're "always going to be an important part of the home market," said Drew Mackintosh, Ryland's vice president of investor relations. He said these buyers are budget and commute conscious: "They like smaller square footages, homes close to city centers and they don't necessarily need a yard."