First-timers Hang Tough

Rumors to the contrary, first-time buyers are alive and kicking, buying houses at virtually the same pace as they were before the first-time homebuyers credit first stimulated demand two years ago.

For the seven months of this year, the first-time buyer market share has been remarkably steady, ranging from 32 to 36 percent of existing home sales through the spring and summer buying season, according to the National Association of Realtors monthly survey of 1300 members.

The Campbell/Inside Mortgage Finance survey, also a survey of real estate brokers, found that the first-timer market share has fluctuated 35 percent in January to 37.7 percent in August.  In the Campbell survey, the first-time homebuyer share of short sales hit a peak of 54.1 percent of all short sale transactions in November 2009, just before the originally-scheduled expiration of the federal homebuyer tax credit.

Today’s 32 to 38 percent range is not far below the 40 percent market share first-time buyers enjoyed in 2003 and 2004, before the boom drove prices out of reach of man or the tax credit created an artificial, temporary demand.

Even though first-timers are saddled with higher down payments, tougher credit requirements, mortgage approval delays (see Mortgage Bottlenecks Hold up Closings), those are not the deal killers that they might be .

Today’s first-timers have found several ways to deal with higher down payment requirements.  FHA’s 3.5 percent down market share has risen from 3 to 30 percent since 2006, and even with tighter credit standards and higher fees that took effect a year ago, FHA remains the financing of choice for most first time buyers.  Many have also discovered the no down payment USGA guaranteed loan program, which also recently raised fees (see New Fees Drive Up Cost of USDA Home Loans)  but has $12 billion a year to guarantee loans.  Today’s credit requirements and documentation are not much tougher than they were 20 years ago.

In fact, today’s all-time low rates, once-in-a-generation prices 30 percent below levels of four years ago and inventories of distress sales discounted below market values in every market should herald a First-time Buyer Golden Age.  Moreover, rents are rising and rental choices are dwindling as vacancy rates rise.

So why aren’t first-timers buying more than they are?

Fannie May’s recent National Housing Survey has some clues.  Future expectations rather than current realities are keeping buyers at home.

“The September survey showed a marked deterioration in consumer expectations of home prices over the next year-their weakest outlook since monthly tracking began in June 2010,” said Doug Duncan, vice president and chief economist of Fannie Mae. “Despite a decline in negative economic headlines during September – in contrast to their ubiquity during the debt ceiling debate in August – consumers continue to demonstrate very negative attitudes. At the same time, the share of consumers expecting mortgage rates to go up dropped sharply to the lowest level we have recorded, likely influenced by the news that the Federal Reserve will attempt to keep interest rates low for years to come.”

“The lack of a sense of urgency to buy homes, given expectations for further declines in home prices and continued low mortgage rates, coupled with general pessimism regarding their own personal finances and the economy, bodes poorly for the recovery of the housing market,” Duncan stated.

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