Lower numbers of first-time buyers are a cause for concern for both home sellers and buyers.The Motley Fool recently reported that first-time buyers have slipped from approximately 40 percent of home buyers to 28 percent.
Why does this matter?
Without a healthy supply of first-time home buyers, sellers of moderately priced homes, may experience delays before they can sell and move up to larger homes. This creates a domino effect as most homeowners depend on selling their present homes to finance their next home purchases; if first-time buyers aren't buying, sellers of homes in higher price ranges may also experience a shortage of qualified buyers.
Several factors contribute to the inability or unwillingness of first time buyers to get their feet in the door of their first homes.
Millennial Generation Causing First-Time Buyer Shortage
The millennial generation, which is roughly defined as those born between 1980 and 2000, does not appear to share previous generations' view of home ownership as a key to financial stability. Until recently, the presumption was that student loans helped students to complete college, which would lead to higher income. In a study published in April 2013, the Federal Reserve Bank of New York found that the home ownership rate for consumers with a record of student loans was two percent lower than for consumers with no student loans.
The Pew Research Center recently reported that 37 percent of U.S. households headed by adults under 40 had student loan debt. High amounts of outstanding debt can hamper or prevent first-time buyers from qualifying for a mortgage loan. Hefty student loan debt payments can also make saving for a down payment difficult if not impossible.
Labor Markets Impact First-Time Buyers
In addition to carrying student loan debt, many recent college grads cannot find employment in their fields of study. According to a report released by the Federal Reserve Bank of New York, the number of under-employed college grads has risen during the past two decades. As of 2012, 44 percent of college graduates were employed in jobs that did not require a bachelor's degree or had part-time jobs with low wages. The double whammy of student loan debt,and underemployment creates significant obstacles for recent college grads that want to buy their first homes.
The combined impact of underemployment and student loan debt can also make it difficult for first-time buyers to meet the maximum debt-to-income ratio of 43 percent under FHFA's qualified mortgage rules.
New Homes: Lower Construction Rate in 2014
Pent-up demand for homes and low supplies of available homes caused home prices to rise quickly in 2013, but the rate of rising home prices has slowed in 2014.
According to the Motley Fool, construction of new homes had slipped to about one million units annually; this represents two-thirds the number of homes that normal housing markets would support. A recent report from the National Association of Home Builders said that builders expressed concerns about labor markets and consumer confidence in the economy.
Existing Homes: Negative Equity Adds to Home Shortage
While housing markets in many areas have improved since the recession ended, home prices remain below their 2006 "bubble" peaks in most markets. This situation has left some homeowners with mortgage debt that exceeds their home's current value.
Homeowners that owe more on their mortgages than their homes are worth have little choice but to keep their homes until home values improve. These homeowners have no home equity and very little (if any) cash proceeds from the sales of their homes even when mortgage lenders approve short sales.
The National Association of REALTORS® notes that cash offers for existing homes are increasing and can sabotage first time buyers. When forced to compete with cash offers, first-time buyers that need a mortgage to buy a home can find themselves sidelined.
While first-time buyers may face challenges in competitive housing markets, there is a wide variety of mortgage options available.
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