Real Estate & Mortgage Insights

Share of First-time Home Buyers Falls to 26 Year Low

Young would-be homebuyers are increasingly unable to make the dream of homeownership come true, according to the results of the latest survey from the National Association of Realtors.

The 2014 National Association of Realtors Profile of Home Buyers found that first-time home buyers made up just 33 percent of all buyers in 2013, down 5 percent from the year before and the lowest share since 1987. Since it began in 1981, the survey average for first-time buyers has been 40 percent.

What’s holding young buyers back? It’s certainly not a lack of desire. An October survey from housing data website Zillow reported that 83 percent of renters between the ages of 23 and 34 expect to own a home someday.

The Great Recession could be blamed for creating a perfect storm of factors keeping young Americans from being able to buy. Many would-be buyers were in college during the recession, taking on increasing larger amounts of student debt, facing an almost non-existent job market when they finished school. As they searched for work, debts continued to rise, bringing credit scores down.

NAR chief economist Lawrence Yun expounded on the woes of Millennials. “Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” Yun said. “Adding more bumps in the road, is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums.”

The strict lending climate seems to be a big problem for the nation’s young buyers.

“Stronger job growth should eventually support higher wages, but nearly half (47%) of first-time buyers in this year’s survey (43% in 2013) said the mortgage application and approval process was much more or somewhat more difficult than expected,” Yun commented. “Less stringent credit standards and mortgage insurance premiums commensurate with current buyer risk profiles are needed to boost first-time buyer participation, especially with interest rates likely rising in upcoming years.”  

The mortgage insurance premiums Yun referred to apply to government-insured loans from Fannie Mae and Freddie Mac as well as those low down payment loans backed by the Federal Housing Administration. New fees have recently been applied significantly increasing the monthly payments for first-time homebuyers. A borrower, for example, now pays about $50 more a month in mortgage insurance on a $100,000 FHA loan.

So with so many factors against them, when will we see a return of first-time buyers to the housing market? Credit standards will certainly have to ease as Yun suggested, and interest rates will need to stay low, but the biggest factor will probably be improvement in jobs and income. Once incomes start to rise again to match the pace of rent and home prices, young Americans will finally have the resources needed to take the homeownership plunge.

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