First-time homebuyers are an extremely important part of the housing market. Without new buyers in the housing market, owners of existing starter homes have nobody to sell their home to and therefore cannot afford to buy a larger home. The effects ripple through the entire market and stifle growth.
A new study by Genworth Mortgage Insurance focuses on first-time homebuyers and their relationship with the housing market dating back to 1994. By Genworth's definition of first-time homebuyers (those who have not owned a home in any of the prior three years, the same definition used by the Department of Housing and Urban Development), 3 million first-time homebuyers have been excluded from the housing market thanks to the effects of the housing crisis of the last ten years. The loss of potential homebuyers plays a significant part in the slow recovery from the subsequent recession.
The study found that from 1994 to 2016, first-time homebuyers accounted for 45% of mortgage originations, averaging annual sales of 1.8 million single-family homes. In the last ten years that encompass the housing crisis and the recovery, the number of first-time homebuyers averaged 1.5 million annually and bottomed out at 1.2 million units in 2011. The aforementioned 3 million potential homebuyers were squeezed out of the market thanks to tightening credit, increasing student loan debt, and other recessionary factors.
Government lending programs and homebuyer tax credits began to revive the first-time homebuyer market starting in 2008, providing the low down payment loans necessary for many new consumers to enter the market. Since then, credit has loosened further and the release of pent-up demand has sent first-time home purchases up to pre-recession levels. Sales to first-time homebuyers hit 2 million in 2016 – the highest level since 2006.
Now that supply is back, demand is a problem. There are too few starter homes to meet demand, and prices are rising significantly as a result – thus the new surge in first-time homebuyers may be cut short.
What do you do if you are ready to enter the market, but rising prices threaten to put a home out of your reach? You do want to act soon if you can to take advantage of low interest rates, as the Federal Reserve has clearly stated that they intend to keep raising rates. However, it's important not to stretch beyond your means.
Author Jordan Goodman, known as "America's Money Answers Man," explains the drawbacks: "The biggest mistake people make when they are buying their first home is underestimating the expenses involved. You really have to be realistic because what happens is if you get into a house and you owe, it's sucking you dry ... the house owns you, you don't own the house."
Set a realistic budget projecting your first couple of years of home ownership, including all the expenses like insurance, taxes, and maintenance. Put in a contingency percentage to account for emergencies, and then see how much money you have left for a down payment and monthly expenses. Honestly assess if you are buying more house than you need, even within the range of starter homes.
If you truly can't afford to buy now, set a plan to reach a new down payment goal for the future. Put yourself in a position to take advantage of fluctuations in the market – because eventually, you will find the house you want at an irresistible price. Then you can join the surge of first-time homebuyers, doing your part to drive the housing market in particular and the American economy in general.