First Time Home Buyers Critical to Housing Recovery

We’ve been hearing about real estate drives our economy by employing at least forty other job categories with each transaction. Until recently, this was depressed by the number of home auctions, real estate owned properties sold by banks (“REOs”), short sales and then the all-cash investors who bought as much inventory at depressed prices as they could. It’s been a crazy run, and for many buyers, highly frustrating.

Demand remains high as those other factors have slowed down considerably and families or individuals are able to purchase homes to live in (vs. rent out or flip for profit). In the short term all appears well, and hopefully will continue in this direction. However, there are warning signs for us to adhere to, in order to prevent further disruptions to what should be a healthy real estate cycle: a steep decline in first time home buyers. In normal times first time home buyers account for approximately 40% of share of market, allowing for existing homeowners to sell and buy another home. At the end of the Recession, the first time home buyer’s market share had dropped to 32% nationwide. For 2013 it had dropped further, to 25%, the lowest in some research firm’s records. US News & World Report explains the importance of the first time home buyer to the housing market recovery here.

The reasons given for this continued decrease are varied. Some are the old tried and true: interest rates are up from their all-time low, housing prices are too high, etc. Even the bipartisan Dodd-Frank consumer protection bill that seeks to ensure the ability of the borrower to be able to make his mortgage payments (rather than the taxpayer, after foreclosure) is blamed. But these are cycles and events that have repeated over many decades without this result. Two key factors appear to make today’s situation a bit different:

1)     College graduates are having a harder time finding employment. The unemployment figures have been increasing for the last several years, but at a snail’s pace, and are still not back to pre-recession levels. When they obtain employment they find that wages are not where they were either; resulting in a depressing effect on whether they can purchase a home. The reasons are varied, among them the fact that employers are not hiring yet at the level they were is one, and another is that many students graduated to jobs that had been shipped overseas. Some of these may come back, but in many cases they will need to repurpose their qualifications to find work.

2)     Additionally, and with far greater ramifications, is student debt. College tuition, including at public institutions, have skyrocketed. Grants and the more rare scholarships have not kept up, and including when combined with the student working as well, obtaining a loan just to complete college is absolutely necessary in historically high numbers. Complicating matters is that Congress will not provide for a lesser interest rate on these loans, as it has done over the past 35 years, and it has allowed for stricter enforcement on repayment, including when the student cannot find work. The results are two-fold: less students able to go to college and therefore on average they are earning less money, many times depriving the economy of their participation in the real estate market (and more revenue through income tax), and among those who graduate, they have much higher debt burden than their predecessors did, delaying their home purchase by a decade or more.

Here is the story about student debt and first time home buyers as reported by the Washington Post.

But it’s not all “doom and gloom” at all. While we all work on these challenges, there are in place many options for first time home buyers. The California Housing Finance Agency (“Cal HFA”) has a whole range of assistance programs for first time home buyers. Also, many cities have renewed their assistance programs and several charitable organizations and faith-based organizations have down payment assistance programs (DPAs). In addition to the above, and even in combination with the above, many lending institutions have their own DPAs, including reduced closing costs or grants to help pay them. Here is the California Housing Finance Agency’s website.

If you are desiring to buy a home for the first time (or the first time in over three years), talk to your realtor® and lender. They can help match you to the program that works best for you.

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