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Why the Housing Market Recovery is Bypassing Young Buyers

Housing-Market / US Housing Jul 29, 2013 - 08:56 PM GMT

By: Money_Morning

Housing-Market

Gary Gately writes: Think of the housing market as a ladder with first-time homebuyers at the bottom and homeowners on the upper rungs, with homes priced higher as you proceed upward.

The first-time homebuyers make it possible for those in the lower-priced homes to sell and move up to costlier homes, which in turn enables the sellers of those homes to move up to costlier homes - and so on.


But amid the housing market recovery - sales of new and existing homes are up and prices have been rising - many first-time buyers are being shut out of the market.

And that has far-reaching implications for the market as a whole, given the role those first-timers play in creating demand from the bottom of the ladder.

"They're the first rung of the ladder," Douglas Duncan, senior vice president and chief economist at Fannie Mae, told Money Morning.

"Once you buy a house, the people who are intending to move up have to be able to sell to someone, and typically they might be selling to a first-time homebuyer, so if there are fewer first-time homebuyers, it makes it harder to move up the ladder."

Why Prospective Buyers are Shut Out of the Housing Market Recovery

The proportion of first-time buyers in the housing market has declined markedly amid the housing market recovery.

Over the past 30 years, first-time buyers accounted for an average of 40% of home sales. But over the past year, they have accounted for just 30% of sales.

Prospective first-time homebuyers, traditionally couples in their late 20s and 30s, lag behind in the housing market recovery for several reasons.

With tight lending standards, it's difficult for would-be first-time buyers to get loans, particularly given many don't have high credit ratings, Lawrence Yun, chief economist at the National Association of Realtors, told Money Morning. Yun said would-be buyers also are more likely than other buyers to be unemployed or underemployed and to be saddled with high student loan debt.

The NAR's Confidence Index shows that between January and June, the median credit score for first-time buyers was 720, compared with 750 for repeat buyers.

Compounding the squeeze on prospective first-time buyers, prices of new and existing homes as well as mortgage rates have been on the rise.

"The higher the rates go, obviously, the less the first-time buyers can afford, especially given the mortgages where you have to put down so much money," Joel Naroff, president and chief economist of Naroff Economic Advisors Inc., told Money Morning.

"So rates become critical, especially for first-time buyers, young purchasers who are on the edge as far as qualification is concerned. That's generally the situation if you look at the group."

Naroff notes homeowners, by contrast, generally have equity and established credit.

There's also more competition for homes from investors. Cash sales, an indication of investor purchases, accounted for 31% of all sales in June and individual investors accounted for 17% of all purchases, NAR says.

Would-be young buyers have not only been shut out of the housing market recovery because they can't buy homes, many of them aren't even renting.

2.4 Million "Missing Households"

Jed Kolko, chief economist of the real estate website Trulia.com, calls these 2.4 million people between 18-34 "missing households" in the housing market recovery: Rather than forming new households, which is critical to the housing market and the economy as a whole, these young people are living with their parents or with others, Kolko says.

"Not only are young people not buying homes; they're not even renting," Kolko wrote on his blog. "Household formation is the most important indicator of the housing recovery that isn't making great strides.... Therefore, household formation is severely lagging behind the rest of the housing recovery."

That creates "pent-up demand for housing that the [housing market] recovery should unleash" eventually, Kolko writes. But for now, he writes, the housing market's missing these prospective buyers, which hinders the housing market recovery: "It could still take years before young people have built up the savings and economic security to leave the nest."

Looking to profit from the housing market recovery? Check out this report and learn about the best REIT to invest in now.

Source :http://moneymorning.com/2013/07/26/why-the-housing-market-r...

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