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September 28th, 2011

The triple threat facing first-time homebuyers



Short SaleFirst-time homebuyers are extremely important to this country’s housing market. The participation of this buying demographic is essential for housing to function properly.

However, just like many other potential buyers in the current marketplace, the influence of first-timers has been diminished.

Check out all our articles dedicated to first-time homebuyers

Today, we’re going to examine three specific factors keeping this integral portion of the market on the sidelines.

1. Down payments

A recent survey found that down payments continue to prevent potential buyers from pursuing homeownership:

Lack of a down payment proved to be the biggest obstacle for young adults (18-34 year olds), as 62 percent cite it as the reason they have been unable to buy a home.

“From saving enough for a down payment to qualifying for a mortgage and having a poor credit history, today’s aspiring home owners face many financial obstacles in order achieve their American Dream of home ownership,” says Jed Kolko, Trulia’s chief economist.

Today’s increased lending restrictions have forced buyers to pony up more cash when buying a home. Besides FHA and a few other government programs, today’s homebuyers need down payments of between 10 and 20 percent of the loan value.

A 20 percent down payment on a $200,000 loan is $40,000! To the other extreme, a 3.5 percent down payment (required by the FHA) on the same loan is $7,000.

Whether it’s $7,000 or $40,000, young, first-time buyers are struggling to save enough money to have enough “skin in the game.”

2. The recession

A big reason why these borrowers are having such a hard time saving their money has been the country’s ongoing economic struggles. Hope Yen of the Associated Press writes, “Young adults are the recession’s lost generation.”

Young adults in this country have faced record unemployment and underemployment. Struggling to find work, many young adults have decided to move back in with mom and dad as opposed to going out and finding places of their own:

“We have a monster jobs problem, and young people are the biggest losers,” said Andrew Sum, an economist and director of the Center for Labor Market Studies at Northeastern University.

3. Distressed real estate 

As we all know by now, real estate markets across the country have been flooded with distressed real estate: short sales, foreclosures and REOs. These distressed properties lower surrounding values and deter many potential buyers, despite the steep price discounts they offer.

According to a recent survey, short sales account for more than one out of every six home sales. However, first-time buyers are quickly losing their patience with short sales:

Among first-time buyers, their short sale purchase share dropped to 39.7 percent of all short sale transactions in August—posting a three-month drop and reaching its lowest share ever recorded for first-time home buyers, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. In November 2009, first-time home buyers’ share of short sales had reached a peak of 54.1 percent of all short sale transactions. 

With bargain deals, why are short sales losing their appeal? Buyers are complaining that short sale transactions take too long to close, with approval times often taking several months after a buyer even submits an offers. Some buyers frustrated at the delays are placing offers on multiple properties, planning to close on whichever one is approved the fastest. The average time on market for short sales is 16.6 weeks, and the majority of that time is spent waiting for short sale approval, the HousingPulse Tracking Survey found.

Who are first-time homebuyers?

In 2010, 50 percent of recent homebuyers were first-time homebuyers, according to the NAR’s 2010 profile of homebuyers and sellers. The typical age of the first-time buyer was 30. According to the profile, first-time buyers typically financed 96 percent of their home purchase.

How can we help them?

HSH.com has created an entire page dedicated to first-time homebuyers. We also publish content on a daily basis in the first-time homebuyers section of our library.

When will these buyers return?

It’s all about confidence. It doesn’t matter the age of the homebuyer, until consumers are confident that jobs will stabilize, home prices will rise, homebuying is expected to remain at a minimum.

Furthermore, first-timers don’t have the luxury of experience which many repeat homebuyers have. Until we see the first-time audience return to the market, you can bet home sales will suffer.

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2 Responses to “The triple threat facing first-time homebuyers”

  1. Jim Says: September 28th, 2011 at 2:20 pm

    I would add that prior generations’ attitudes towards home buying is also an inhibitor. New first time home buyers need to come with the expectation that the house is a place to live, not an ATM and not an asset that appreciates in value.

    It seems that in the prior decade, home ownership became more about making money than it had ever been. First timers are now hearing so much negativity about how homes can be terrible “investments”

  2. Tim Manni Says: September 29th, 2011 at 11:22 am

    That’s a good point Jim! I agree: When did a house go from a home to an investment? Sure, everyone wants to make a profit on a home, but when profits outweigh other factors, I think things get skewed.
    Thanks for the comment,

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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