For about six months, Kevin Erspamer has been looking to buy his first home, in Brooklyn. “We’ve looked at 30 places at least,” he says.
His verdict? “We’re holding off for now.”
Him and would-be first-time homeowners across the country.
At one point, first-time home buyers accounted for 50 percent of all home sales. Right now, they’re 29 percent. And that number is pretty much where we were four years ago. Even counting the fact we are in a post-bubble, post-recession recovery, “first-time home buyers are down 20-25 percent from where they would normally be in the market,” says Chris Mayer, Paul Milstein Professor of Real Estate at the Columbia School of Business.
In Erspamer’s case, prices have been high, for starters – sometimes rising 30 percent in just the time he’s been looking. Another problem he’s run into is the all-cash offer.
“You go, the open houses are completely full, and then the guy is like, we’ve had a number of offers over asking price, including all cash offers,” he recalls. “It makes you feel a little discouraged, like why would they ever accept my offer with financing if they have an all-cash offer.”
In the first quarter of 2014, 43 percent of U.S. residential property sales were all cash.
“That’s the highest number we’ve ever seen and it’s really an astounding number,” says Daren Blomquist, vice president of RealtyTrac.
So who are these people who can lay down cash?
“Investors – just regular investors, as well as a new breed of investors entering this market, what we call institutional investors backed by hedge funds,” Blomquist says.
In some markets, foreign buyers looking for a place to park cash are an issue. Florida, California, Arizona, Texas, and New York account for 61 percent of international home purchases, according to the National Association of Realtors. But there’s also a significant domestic competitor, says Blomquist.
“You also have retirees who in some cases are selling their homes in other parts of the country, and because they have built up equity they have cash to go buy a place in Florida,” where they can downsize.
While it might seem easy to blame Wall Street, the foreigners, and Grandma, there’s more going on.
“In a sense its crowding out, but it’s really just a reflection of the challenges that younger households are having coming into the market to buy a first home,” Mayer says.
There’s less inventory and more demand, which has pushed prices higher than many first-time buyers are comfortable with. Replenishing that inventory will “take some time because that’s going to require home builders building more homes and current homeowners who own a price deciding they have sufficient equity to sell their home and move up,” says Mayer. “That’s another missing piece – the move-up buyers,” he adds.
Mortgage lenders are still extremely fearful of lending to anyone without the most pristine credit. “Until very recently, the last couple weeks, if you were a lender for Fannie or Freddie, and the borrower missed any payment in the first 36 months, you’re facing the potential of having to buy that loan back from Fannie or Freddie.”
Student loans are crowding out first time homebuyers’ ability to buy as well. “People with student loan debt, historically, have also been more likely to have a mortgage,” says Mayer. “Which meant they were able to buy a home. That has switched to the point that people with student loans today are less likely to have a mortgage. So it looks like student loan debt is pushing back the age of first time home purchase for many people.”
And don’t forget that the Federal Housing Authority now charges much higher default insurance premiums, meaning consumers can’t turn to the government for the same kind of support as in the past. “In typical years, the FHA’s share of the first-time home buyer market has been as high as 60 to 70 percent, it’s dropped to the 30 percent range,” says Malcolm Hollensteiner, director of retail lending sales and production at TD Bank.
In the short term, these factors don’t appear to be changing much.
“Until that first-time homebuyer regains confidence and becomes more active in the marketplace, we’re going to continue to have a very soft housing recovery,” Hollensteiner says.