Realty Views By Terry Ross
July 30th, 2013 – The key to consistent, long-term health in any real estate market starts at the bottom – with the first-time buyer.
Historically first-time buyers start the domino chain by buying less expensive homes, whose sellers in turn move up to mid-range properties, whose sellers likewise move up to upper level-priced homes.
If there was any doubt that this is the normal cycle in real estate, statistics kept by the National Association of Realtors (NAR) showing that 40 percent of purchases in the resale market over the years were made by first-time buyers should be more than enough evidence to prove the point. But the same organization has also recently revealed some rather unsettling news concerning the trend of first-time buyers as a dominant force in the marketplace.
In May of 2012 the percentage of first-time buyers had dropped to 34 percent of the resale market; by April of this year the number had dipped to 29 percent, and in May it was down to 28 percent. This is an unmistakable trend that does not bode well for a continued revival of residential real estate.
The reasons for this trend are many, and some of them have to do with changing habits and the economic status of the first-time buyer – which is for the most part younger and not well financed.
First of all, the recession hit the 25-to-34-year old demographic harder in terms of unemployment, according to Jed Kolko, an economist with Trulia. The youth unemployment level is at 20 percent and for college grads (age 25 and under) the un/underemployment rate is 50 percent.
Many of these potential younger buyers are also burdened with mounds of student debt. According to a study by the One Wisconsin Institute, the home ownership rate among those paying off student loans is 36 percent lower than among those in the same age range who do not have to contend with student loan debt. Even among those earning between $50,000 to $75,000 per year in the same age range, the home ownership is 28 percent lower among those saddled with paying off college loans.
In the United States there is an estimated $1.1 trillion of student loan indebtedness on the books for recent graduates with an average balance of $27,000, but many of those debts range from more than $50,000 to over six figures – more like a small mortgage itself.
If that weren’t enough, financing is much harder to come by since the real estate bubble burst five years ago, and down payments for conventional loans are pretty much at 20 percent or more. FHA loans, which require a much lower down payment, are more expensive and seem to be on a trend to be even more so. Credit requirements for loans are also much tighter in the past.
One of the other major factors inhibiting first-time buyers is the fierce competition for property that does get on the market. Even though conditions have stabilized, there is a vast segment of the market that is still underwater, where sellers can’t afford to sell at the prices that people will pay today. One estimate is that 43 percent of owners in the 35-39 age bracket – a key age range for those looking to move up – are still underwater on their mortgages. Until this changes, there is going to be a shortage of available listings for buyers who are willing and able to make a purchase.
Then there is the investor factor. On top of all of these hurdles and a lack of inventory on the market, investors have come in to make all-cash purchases, accounting for 33 percent of all existing home purchases in May. With loans being harder to get and sometimes taking longer than ever to process, the quick all-cash sale is going to get the nod with 10 offers on the table, so the first time-buyer is at a real disadvantage.
Turning this situation around will take some help from Washington. An improving economy overall will help – especially with the strengthening of the job market – but a fundamental improvement in financing programs and assistance with student debt that is strangling many young potential first-time buyers are going to be the biggest factors in creating a revived and healthy real estate market.
(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at firstname.lastname@example.org or call 562/498-1049.)