U.S. home prices have risen for 14 straight months, but first-time buyers have been increasingly on the sidelines.
In May, first-time buyers accounted for 28 percent of existing-home purchases, down from 34 percent a year before and 36 percent two years ago, according to the National Association of Realtors.
The declining share of first timers means that many have missed out on low interest rates, which recently moved up from near-record lows, and home prices that have risen sharply from their bottom.
“The people buying homes today … are participating in home price growth. Younger people, they are being left out,” says Lawrence Yun, chief economist of the NAR. “It remains to be seen when the first-time buyer can return.”
First-tme buyers are critical to a housing recovery because they help existing-home owners sell and move up to larger or more expensive homes. But their presence is being reduced by:
• Competition. Cash buyers accounted for 33 percent of existing home sales in May. Investors, who are often all-cash buyers, accounted for 18 percent of purchases, the NAR says.
Cash buyers are tough competitors, especially in markets with limited inventory and for first-time buyers who often use low down-payment loans to finance purchases.
The first-time buyer “is being squeezed out of the market a lot,” says Zillow economist Svenja Gudell.
There are also more repeat buyers in the market, given that higher home prices have enabled more people to sell homes and buy others, says Glenn Kelman, CEO of brokerage Redfin.
• Tight credit. Home loans are harder to get than before the housing bust, and that’s true for first-time buyers, too.
Almost half of first-timers get low down-payment loans through the Federal Housing Administration, NAR data show.
New FHA home loans in the last three months of 2012 went to borrowers with an average credit score of 696, vs. under 660 in 2007 and 2008, FHA data shows. Credit scores, which run up to 850, for conventional loans have also risen.
• Recession. It hit the 25- to 34-year-old group with higher unemployment than for adults overall, says Jed Kolko, Trulia economist. Young people have made a strong recovery, but it takes years of steady employment to save a down payment and build strong credit, he says. High levels of student debt will also delay homeownership, Kolko says.
Increases in home prices and mortgage rates since last year have made a big difference in costs.
In May, the median value of the bottom third of homes in San Francisco was $287,500, Zillow says. With today’s 4.4 percent interest rate and 20 percent down, the mortgage payment runs $1,154, that’s $313 more than at last year’s prices and rates, its data shows.
“You’re getting a double whammy with higher prices and rates,” says Ashley Krause, 31, of Boston, who’s been trying to buy her first home for six months with a down payment of 5 percent or less.
The hospital pharmacist has lost two bids to others.