These People Could Cause Another Real Estate Crash

There is one group of buyers that represents nearly 40% of all homebuyers. If they were to disappear, what would it mean for the U.S. housing market?

Jun 22, 2014 at 9:30AM

The real estate market has performed pretty well over the past couple of years, with the average U.S. home price about 27% higher than the 2012 lows. So, this means we're out of the "danger zone", right?

Not so fast! There are still a few things that could very easily end the housing rally that we need to keep an eye on, and one of the biggest hazards is first-time homebuyers staying out of the market, which is already happening.

With the recent data indicating the market is slowing down, it is more important than ever to watch for signs of trouble.

First-timers are an important part of a healthy housing market
Historically, first-time home buyers have made up about 40% of the market and this has dropped recently. According to the National Association of Realtors, 38% of 2013 U.S. home buyers were first-timers, and the percentage declined throughout the year, dropping to as low as 27% in December, the lowest percentage since they began tracking the percentage in 2008.

There are several reasons first-timers might be struggling to afford homes. Higher prices, tight credit, poor employment prospects, and high debt could all be keeping first-timers on the sidelines.

Mortgages are either tough to get, or unaffordable
Up until a few years ago, the traditional route for first timers, FHA loans, were much more affordable.

Not only has the upfront mortgage insurance premium nearly doubled from 1% to 1.75% of the loan amount, but the annual mortgage insurance must be paid for the entire life of the loan. With an FHA loan, an interest rate of 4.5% actually works out to an effective APR of closer to 6%. For a comprehensive discussion of how much more expensive an FHA loan is, here is a thorough discussion

Conventional loans typically require a 20% down payment, which is getting tougher for first-timers to come up with as prices rise, and credit requirements are very high. The average FICO score for a conventional purchase loan is currently 755, and the average rejected credit score is 724, which is well in the realm of "excellent" credit.

Poor job market for younger people
Adding to the unaffordability of homes for first-timers is the difficulty of finding a good job. The unemployment rate for recent college grads is 8.5%, well above the national average, and another 16.8% are underemployed. The situation is even worse for younger adults who didn't graduate college, with some reports putting the unemployment rate for those under 25 with just a high school diploma at a staggering 30%.

So, even if young, potential first-time buyers have the credit and down payment, they won't have much luck obtaining a mortgage without the income to justify the loan.

As debts rise, less younger people will be able to buy
It's no secret that student loan debt has grown tremendously over the past couple of decades. The debt may or may not be worth it to obtain a degree and (theoretically) a higher paying job, but what's certain is more debts make it difficult to buy a house.

However, it's not just student loan debt we should be concerned about. The average "millennial" (ages 22-33) spends 12% of their take-home pay on student loans according to a recent survey, which is surprisingly not the biggest debt burden they have.

Credit card debt is often the biggest problem for younger adults, and eats up about 16% of the millennials' take home pay, on average.

Most mortgage companies shoot for total debt-to-income ratios below 36% for conventional loans, so if 28% of millennials' income goes to paying off student loans and credit cards, it doesn't leave much room to take on a mortgage.

To sum it up, home sales are still below what's considered a "healthy" level, so the market can't afford to see this huge group of buyers disappear. Any further drop in the percentage of first-time homebuyers in the market could be a warning sign for the housing market.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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