It's a perfect market for first-time homebuyers, right?
Home prices are still affordable, monthly rent for apartments continues to increase, and mortgage rates are still incredibly low. Yet despite all that, there's actually fewer first-time homebuyers now than ever before! According to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey results, less than 35% of the homes sold nationwide in October were purchased by first-time buyers. Not only is that figure well below what experts consider a healthy housing market (where 40% of all purchases are by first-time buyers), but is also the lowest percentage ever recorded by the survey.
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So, can the housing market make a full recovery without a surge of first-time buyers?
While the first-timers aren’t coming out in droves, the investors are. That’s because those low prices and low rates are catching the eyes of investors and cash-rich senior citizens. Buyers are scooping up properties while they still can a great deal on a home, and hoping that its value will increase in the near future as the housing market continues to recover. Oftentimes, these investors and seniors have better credit scores and more money to put towards a down payment than a first-time buyer. In the past, there were different loan options for prospective first-time buyers if they didn't have a high enough credit score or the traditional 20% down payment. The most popular choice was getting a loan insured by the Federal Housing Administration that only requires a FICO credit score of 620 and a 3.5% down payment. But the FHA has recently experienced financial trouble, and therefore, has become stingier with their loan approvals. Their stricter standards means less people qualify for this type of loan, and economists say that could be to blame for the decrease in first-time buyers.
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So, can the market recover?
First-time homebuyers play a crucial role in the housing market's recovery, because typically speaking, they buy homes from sellers who are either trading up to a more expensive home or are building a new one. Without new buyers purchasing homes, existing homeowners are stuck, affecting the number of larger, more expensive homes sold and stalling new home construction. But we've already discussed that investors and seniors have taken the place of first-time buyers, and are purchasing smaller homes in record numbers. So, as long as someone is purchasing the smaller homes, the sellers can move forward with their plans to buy or build a larger home. For now, it seems that investors and senior citizens have taken on that role, but that might not be the case in the near future. Economists point out two trends in the most recent Standard and Poor's/Case-Shiller Home Price statistics that might curb the enthusiasm about returns for investors. Home prices in metro areas are slowing on a month-to-month basis, and the year-to-year comparisons are actually showing a decrease in value, since many housing markets are approaching the one-year anniversary of their lowest price points.
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So, what does all this mean?
Right now, there's no reason to be alarmed about the lack of first-time buyers. The homes that they would typically buy are still being purchased, just by different demographics of people. As long as investors and senior citizens are purchasing the smaller, more affordable homes on the market, the sellers of those homes can then go out and purchase more expensive homes. If the return on investments does drop off as expected, there will likely be a decline in the number of investors scooping up properties. That's when first-time buyers come back into the picture. Many of they do not currently have the 20% down payment necessary for a traditional loan, so they should start saving towards that goal now. The real problem will exist if investors no longer think they can make profit by purchasing real estate, yet there aren't enough first-time buyers who meet stricter lender standards to pick the slack. Only time will tell if that happens, and if it affects the overall health of the housing market.
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