They're not yet an endangered species, but their steadily diminishing presence has some real estate analysts worried: First-time buyers are missing in action in housing markets across the country.
Traditionally first-timers have accounted for around 40 percent of purchases in the resale market. But in May, according to the National Association of Realtors, they were just 28 percent, down from 29 percent in April and 34 percent a year ago.
Big deal? Yes. If predominantly young, first-time purchasers are not entering the homeownership pipeline at anywhere near their traditional rate, at some point the system begins to choke. Owners of modest-priced starter homes find it more difficult to sell and move up. They in turn can't buy the larger homes they crave, reducing demand for houses in the more expensive categories. A shortage of first-time buyers at the intake level eventually triggers problems all the way up.
Where are these previously dependable first-time homebuyers in their late 20s and early 30s? A new national study released last week offers important clues: A lot of them are carrying such heavy debts from student loans that they're postponing buying houses.
Researchers for the One Wisconsin Institute found that the rate of homeownership among individuals who are paying off student loans is 36 percent lower than their peers who have no student debt. The disparity can be seen at all income levels. Among individuals who earn $50,000 to $75,000 a year, those who are still paying down student loans have a 28 percent lower rate of homeownership compared with others in the same income group.
Bulging student-loan balances aren't short term issues, either. The institute's study found that the average payoff time is 21 years, ranging from 17 years for those who attended college but did not get a degree to 23 years for those with graduate degrees.
Worse yet, student loans are exhibiting high default rates — currently about 13.4 percent. That depresses credit scores and makes it more difficult to qualify for a mortgage under today's toughened underwriting standards, where average FICO scores for buyers using conventional mortgages top 760.
Even financial regulators are now acknowledging the troubling linkage between student-debt loads and declining home purchases. In a recent report, researchers at the New York Federal Reserve said heavy student-loan balances that limit access to credit “may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally.”
Total outstanding student debt now exceeds $1.1 trillion. Debt loads for recent graduates average just under $27,000, but an estimated 13 percent of outstanding balances range from $54,000 to $100,000.
Student debt troubles are hardly the only barrier keeping first timers out of the market, however. Stan Humphries, chief economist for Zillow, the online real estate site, says there are three additional important reasons behind the trend:
• High down-payment requirements for conventional loans — averaging just below 20 percent. The Federal Housing Administration's lower down payment options are attractive, but recent premium hikes can make FHA loans more expensive than competing conventional mortgages.
• Persistent negative equity problems among the owners and potential sellers of the lower-priced start-up homes that first-time buyers traditionally could afford are keeping those properties off the market because owners don't want to take a loss at settlement. Roughly 43 percent of owners in the 35 to 39 age bracket are still under water on their mortgages — nearly double the rate for homeowners overall.
• Cash-rich investor competition. For those affordable homes that do come on the market, first-time buyers frequently are losing out to investors who can pay hard cash, no financing contingencies.
Problems like these aren't likely to go away anytime soon, Humphries believes, but they could improve gradually. For example, financing terms could loosen up as interest rates rise and lenders who've been feasting on refinancings are forced to reach out to purchasers — including first timers — with more favorable deals. Similarly, as home prices rise, investors are likely to cut back on their purchases of starter homes they turn into rentals, thereby opening new doors for first-time buyers.
Student debt burdens are a much tougher nut, though. Until the unrelenting increases in higher education costs get under control, it just may be that some first timers will have to enter the market later than they have done traditionally.
Kenneth Harney is executive director of the National Real Estate Development Center.