Here’s Why There Are No First-Time Home Buyers

Spring has sprung, but the budding housing recovery hasn't blossomed. Sales of existing homes in March were 7.5% lower from the previous year, and analysts from Morgan Stanley reduced their expectations of existing home sales for the spring season late in April.

Why is the housing market in such a slump, six years after the crash? Though factors such as a brutal winter and a lack of investor activity were cited, the biggest problems analysts saw were the still-high percentage of underwater homeowners, and a lack of viable first-time home buyers. 

The last part is spot-on, it seems: there is a real dearth of first-time buyers populating the market right now, and things are definitely not looking up. Normally 40% of the housing market, this group now constitutes a paltry 28% of buyers. And the primary group associated with that market, the Millennials, is staying away in droves. 

Why has the first-time home buyer disappeared? Here are two huge reasons – neither of which looks surmountable any time soon.

Student debt is (still) hobbling young buyers
The enormous amount of student loan debt carried by college graduates has played a large role in the slow recovery of the housing market, and that situation is essentially unchanged. Last spring, the Federal Reserve Bank of New York found that the rate of home ownership among 30-year-olds with student debt fell below that of their peers who were not similarly burdened.

The FRBNY revisited this issue once again recently, and saw the same situation, with a twist: while young people with student debt still exhibited lower rates of homeownership than those without debt, both groups showed even less participation in the housing market last year than they did in 2012. Worse still, those with college loan debt showed no indications of recovery from this retreat – something that never happened before the Great Recession, since college graduates were previously able to leverage their degrees to ramp up their earnings. 

Affordability is fading
Rising home prices and more stringent mortgage rules are creating a perfect storm for first-time buyers, effectively pricing many out of the market.

The new rules are meant to ensure that only those that can truly afford to repay their loan are granted a mortgage. Since the rules have gone into effect, however, many would-be buyers have found themselves on the verge of purchasing a home only to find that their lender requires a never-ending stream of documentation in order to approve the loan. 

Price increases have become problematic, too, with low inventory being the biggest culprit. New home construction is only about 1 million units annually, two-thirds of what a normal market would be able to support. Existing home sales have been hampered by underwater loans, as well – meaning that current owners cannot afford to sell, pay off their loan, and move into a pricier house. 

A recent Trulia survey points up just how entrenched this problem has become. The poll of Millennials who expressed interest in buying a home indicated that scraping together an acceptable down payment is impossible for many.

Fully half of those without the financial means to do so said that they would ask relatives for a loan, apparently not realizing that this would only add to their already onerous debt load. Still, 65% would not give up their car to save for a down payment, and 20% refused to do without cable. Even 5% said they wouldn't cut back on daily latte drinks in order to save money. 

With these issues pressing upon the still-wobbly housing sector, a full recovery looks far off, indeed.

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  • Report this Comment On June 09, 2014, at 12:00 AM, lilys wrote:

    I wonder how many of those Millennials aren't willing to give up cable because they can't give up cable. They don't have it to begin with. I don't know of any Millennials who have cable.

  • Report this Comment On June 10, 2014, at 3:12 PM, RunawayUD wrote:

    One other factor that no one seems to mention....

    To be competitive in the job market and move up the ladder, Millenials and Gen Y have to be extremely fluid in their living situation. This allows them to take advantage of job opportunities in other countries and other cities.

    This is very different than my father's generation. In the same general field (engineering), my father and his siblings were able to work for the same company in the same town for 30+ years. It made sense to buy a house. Since graduating college roughly 9 years ago, I've lived in three different cities and one foreign country for work. Most of this even came within the same company.

    With this fluidity built-in to beginning jobs in corporate America, I think that we will continue to see people put off owning a home until their careers become more stable (mid-30's - 40's). So even those with good careers and the earning potential to buy are waiting longer out of necessity.

  • Report this Comment On June 10, 2014, at 7:31 PM, PriscillaB2 wrote:

    even with all the reasons why first buyers are disappearing, I found a way how to become one. Got really tired of renting, but still working on repairing my credit after being out of work for a while. I started to look for alternatives and came across the rent to own. I read a great book about it and feel confident I can leave my rental unit much sooner than I ever hope. Check it out - maybe it will help you as well:

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Foolish financial writer since early 2012, striving to demystify the intriguing field of finance -- which, contrary to popular opinion, is truly what makes the world go 'round.

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