Market sees fewer entry-level buyers
WASHINGTON — Though the housing market is rebounding in many markets, there is one important segment that is not: First-time buyers represent a smaller proportion of overall sales activity than their historical norm.
Whereas first-timers typically account for roughly 40 percent of sales, lately they've been involved in anywhere from 30 to 35 percent, depending on the source of the data. Lawrence Yun, chief economist for the National Association of Realtors, estimates that there were 2.2 million fewer first-time purchasers in the United States between 2008 and 2012 — a deficit of about 450,000 a year.
This represents a potentially significant issue for homeowners and sellers in the overall market. Without entry-level purchasers, the housing system doesn't work well. If there's no one to buy moderately priced starter homes, the owners of those houses can't sell and move up.
So what's the problem? Where are these first-timers who should be jumping in while mortgage interest rates are near all-time lows and prices in some markets are still at 2004-05 levels? Recent economic jolts — the recession and relatively high unemployment rates for younger workers — are crucial factors. Disproportionate numbers of 20- and 30-somethings have moved back home, living with parents, or they're renting with others, rather than purchasing a house.
Tougher underwriting and qualification requirements by the banks are also important contributors. Fed Chairman Ben Bernanke has said so, and President Barack Obama singled out tight lending standards — even for borrowers with solid credit — as an issue in his State of the Union address.
On top of these burdens, though, there's still another financial albatross: massive student debt levels and their toxic interaction with lenders' stringent rules on "debt-to-income" ratios.
Student loan debt loads have exploded in the past decade and now exceed $1 trillion, according to financial industry estimates. A Pew Research study last fall found that the average student debt balance is $26,682, and that more than one in 10 graduates are carrying close to $62,000 in unpaid student loans. Both numbers are up sharply from just five years earlier.
Lenders and realty agents who work with first-time buyers say the student debts that many of them bring to the table are often deal-killers because they can't qualify under current debt-to-income limits.
Under current lending standards, a total debt ratio of 43 percent is about as high as an applicant for a conventional loan can go, absent strong compensating factors such as lots of money in the bank — something most first-timers sorely lack.
FHA-insured mortgages offer a little more flexibility, says Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., who recommends them for buyers with student debts, but usually after the applicants negotiate a deferral of payments if the balances are troublesome.
Paul Reid, an agent with online brokerage Redfin in Irvine, Calif., says it's particularly tough for first-timers right now because even when they qualify for a mortgage, they often get outbid by investors who offer all-cash deals for starter homes.
Good advice for first-timers carrying student debt: check out the FHA. Keep your offers simple. And work with an agent who knows how to navigate you through today's perilous underwriting shoals.