5 Items That Affect First Time Homebuyer PurchasesBy JD Esajian on October 12, 2016
First-time homebuyers are the backbone of the purchase market. For as well as the real estate market has recovered in recent years it has yet to fully hit its stride. The main reason for this is because of a lack of first time homebuyer participation. When the market was booming in 2005-2006 first time homebuyers made up almost half of all total purchases. Loan guidelines and programs certainly had an impact but the overall demand for new homes was much higher. In recent years first time homebuyers have slowly started to trickle back into the market but not nearly at the level needed. When first time homebuyers come back in full force the market will start to take off. Here are five reasons for the decline in first time homebuyers.
- Student Loan Debt. In just the last five years alone the amount of student loan debt has risen substantially. More than ever graduates are leaving college with a sizable amount of debt. Instead of hitting the job market willing to learn the ropes of a new job they need to make money immediately to pay off their debts. In many cases this debt is in the range of tens of thousands of dollars. Not only does this impact what a prospective first time homebuyer can afford but also what they are qualified for. The period of time that recent graduates begin looking for a new home is longer than ever before. In the past the average first time homebuyer range was 23-26 years old. With increased student debt that age has been pushed back at least three to five years. As the price of college has increased so has the amount of student debt. This cannot be overlooked as it relates to first time homebuyers.
- Lack Of Down Payment. In the height of the purchase boom last decade there were a number of minimum down payment programs. It was not uncommon for a buyer to have to come up with nothing except for the closing costs and property taxes. Since the mortgage collapse all of these programs are long gone. The closest thing a new buyer has today is an FHA program. With FHA a new buyer can get approved with just 3.5% of the purchase price. There have also been an increased number of 3% down payment programs in recent months. While this decrease is a help to buyers it is not enough to generate interest. In addition to the down payment the buyer must come up with the closing costs and six months of property taxes. On a $200,000 purchase a new buyer may need well over $12,000 or more to close their loan. Many new buyers are just not in a position to come up with this kind of money currently. Even if they are allowed to receive some, or all, of this as a gift this is still a major sticking point for many first time homebuyers.
- No Established Credit. Getting new credit in college is often a catch 22. On one hand you need student loans or credit cards just to get by. On the other hand too much debt will lower your credit score and become a burden to repay. For every student that embraces debt a large segment is determined to avoid it. While this may work to their benefit debt wise it hurts when they apply for a loan. Lenders need to see at least three forms of established credit on their loan application. If you do not currently rent finding three can be a problem. Even if a lender accepts a phone bill or even a utility bill there may not be enough credit to compute a credit score. Many new first time homebuyers simply do not have the credit they need begin the loan process.
- Monthly Payment Affordability. Even with interest rates still near all-time lows many prospective buyers cannot afford the monthly payment. They have learned their lesson from the last decade in that it is not enough to own a home if you can’t afford it. Many would be buyers look at the loan amount and assume there isn’t anything else that goes into the payment. Between the property taxes, the homeowners insurance and private mortgage insurance the new payment is often hundreds of dollars more than expected. With the rental market still strong in many places there are more rental options than ever before. Renters can live in nice apartments in good locations for much less than the cost of a new home.
- Job Stability. Although employment has stabilized throughout the country many sectors and markets have not recovered. For recent graduates who are trying to get their footing in their careers this can be a difficult time. They don’t know where they will be working in in a few years and don’t want to commit to buying a house. They have seen how quickly jobs can be lost and heard stories of people close to them. Even if they are in a successful career path they know that they can be relocated at any time. Staying at the same company for years is not nearly as common as it once was. Job stability and first time homebuyers often go hand and hand.
There has been a slow trickle of new loan programs aimed at first time homebuyers in recent months. Whether or not these continue is yet to be seen. What is undeniable is that until there is a steady rush of first time homebuyers the housing market will never really take off.