Declining First Time Home Buyers Slows Recovery

Bloomberg Personal Finance is reporting that Americans are being shut out of the housing recovery

because of rising prices and tougher credit standards. First-time buyers accounted for 26 percent of purchases in January, the lowest level recorded by the National Association of Realtors (NAR) since it began tracking the data in October 2008. The decline of these buyers threatens to slow the pace of the economic recovery.

Inventory Smaller

More moderately priced homes are usually the main inventory for first time home buyers, and that inventory has shrunk do to cash investors snapping them up for rentals. In December, 47 percent of U.S. purchases were paid for with cash, up from 27 percent a year earlier. In addition adding to the already shortened supply, thirty-nine percent of owners looking for better homes plan to keep their current house as a rental. Higher mortgage costs are also a burden for first timers. Rates for 30-year fixed loans climbed to 4.37 percent last week from a near-record low of 3.35 percent in early May.

Lender Issues

The FHA, the biggest source of financing for first-time buyers, has raised the cost of borrowing and tightened underwriting to cope with losses on mortgages it insured as the property bubble burst. The number of FHA borrowers purchasing their first homes declined by 38 percent last year. For buyers whom go with other lenders they are requiring higher FICO scores. More than 40 percent of borrowers in 2013 had FICO scores above 760, compared with about 25 percent in 2001. Because of these difficulties, new home owners aren't even applying for home loans.

Young People Home Ownership Down

The home ownership rate for people in their 20's and 30's fell to 42.2 percent in 2013, the lowest in 19 years of Census data. While purchases rose 8.2 percent for residences costing more than $250,000, they fell 10.7 percent for homes worth less. Leslie Appleton-Young, chief economist for the California Association of Realtors sees the decline as ‘a huge problem’. Another economic factor to add to the decline of first time home buyers is, housing prices are rising faster than incomes at this point. What’s a first time home owner to do? Focused strategy oriented planning is the best path for those interested in purchasing their first home.