What Happened To The First Time Homebuyer?
By JD Esajian on October 2, 2013
One of the biggest aspects that gave the real estate market a giant push last decade was the first time homebuyer market. While home prices and sales have inched up over the past few years, first time homebuyers and buyers under 25 years of age need to become active in the market for the recovery to continue. There is no denying the importance of new buyers to the market. With home values and interest rates still historically low, there is still time for new buyers to enter the picture. If not now, it could be a long time until we see another opportunity quite like this.
There are many reasons why first time homebuyers are reluctant to buy. The first has to do with current income and employment situations. Unemployment numbers have gone down since the high of 2009, but many recent graduates are still unemployed or under employed. This leads to financial uncertainty or, at a minimum, the inability to come up with closing cost and down payment money. The FHA currently has the lowest possible down payment option at 3.5 percent, but with that comes increased private mortgage insurance monthly payments and tougher guidelines.
If FHA programs are not a realistic option, the next best solution is to come up with a 5% down payment. That 5% does not include any closing cost, insurance, appraisal or property tax money. This leads many would-be buyers to the renter pool. Renters have benefited from the strongest renting pool in recent history. Renters now have multiple living options. Not only is renting not a terrible option right now, many currently prefer it over homeownership.
It was not too long ago that owning was considered a form of forced savings towards retirement. Taking money in the way of equity was a last resort and only used for major life situations like weddings or to pay for school. All of that changed around 2005, when property values shot up and homeowners realized they are sitting on a tremendous amount of equity. Instead of waiting 20 years until the home is paid off, they can take money out now and keep the monthly payments nearly the same. That option is not available in this market. Equity can be attained, but only for the right property in the right location and with the right upgrades. New buyers don’t want to start out in a starter home and move up. They want their first home to be the one they raise a family in. To do that, they need to build up and put down 10-20% in this market. If that is not an option they are content to rent. They won’t get the tax benefits of owning, but they won’t have to pay taxes, maintenance and a higher monthly payment either.
Where is the next wave of homebuyers going to come from? With an increase in student loans and employment prospects not great for new graduates, it doesn’t appear that graduates will fill that void. The next great buying wave will not come from first time homebuyers, but from the millions of people who went through foreclosures in the past five years and are ready to buy again. It may take a few more years to materialize, but all of those homeowners who have gone through their issues owning and have rented the past few years will reenter the market at some point and drive the market forward. There may need to be a tweak in mortgage guidelines to make this happen, but if low interest rates and home values aren’t enough, something needs to be done.