Sep122013

When will first-time homebuyers return to the market?

The typical sources of housing demand are largely absent. In particular, first-time homebuyer participation is at near-record low levels. First-time bomebuyers only make up 29% of the market today, compared to 40% in normal times. Without first-time homebuyers, long-term homeowners are unable to execute move-up trades. This causes sales volumes to flag across all market segments.

Some point to the lack of first-time homebuyers as a significant source of pent-up demand. For example, more Millennials are living at home than any generation in recent history. Perhaps that generation will step forward and begin buying houses, but they face some significant headwinds which may keep them out of the market for many years.

Young homeowners sidelined by employment woes

Unemployment up to 7.8% among Gen Y

Megan Hopkins — September 6, 2013 12:18PM

Young adults between the ages of 25 and 34 are still struggling in the job market, bad news for the housing industry that is relying on first-time homebuyers to bring the recovery into full fruition.

According to Friday’s report from the Bureau of Labor and Employment Statistics, only 74.8% of young adults are working — the lowest number in 12 months and far below normal levels. During the recession, between 73% and 74% of young adults were employed.

Consequently, the unemployment rate for young adults rose to 7.8% in August, representing the highest level since February.

And many of the jobs this generation is finding are part-time jobs without sufficient income to buy a house.

In addition to their struggles to find a job, many young adults are buried in a mountain of student debt. In fact, student loans are now the largest component of non-mortgage and home equity debt at $994 million, a second quarter report from Kroll Bond Ratings revealed.

“The ongoing increase in student loans is disconcerting in light of the elevated unemployment levels for younger age groups,” the report stated.

So how are these unemployed and indebted young adults supposed to buy a home and help the liquidity of the housing industry?

Realistically, they don’t. Further, this is not a problem that is solved quickly or easily — if at all. First, finding a high-paying job that provides sufficient income to support a mortgage payment is no easy task in this market. But once they find one, they are over the first hurdle. The next two are more difficult to jump.

After finding a job, the prospective homebuyer must save enough money to provide a down payment. I wrote the Renter’s guide to preparing for home ownership to address this issue. A disciplined saver willing to sacrifice current consumption can save for a 3.5% down payment in just under two years — two years at a minimum, and that’s only for the most disciplined and least indebted. Unfortunately, most people upon getting a new job go lease a new car and max out their credit cards. That behavior takes them out of the housing market for many more years.

The second difficult and time consuming task for the younger generation is to pay down debts to fit within the 43% back-end DTI cap. Even if they have the qualifying income and the down payment, if they have too much debt, they won’t get a house. As I mentioned above, many take on car leases and consumer debt, but the larger problem is with student loans.

Most potential homebuyers with the income to afford a house went to college to get that high-paying job. In the process, the likely acquired a huge student loan debt. It may take five, ten or twenty years to pay down this debt enough to qualify for a house. In what can only be described as another appalling example of bail-out mentality ruining America, some are suggesting we forgive these student loan debts so this generation can take on mortgage debts. Since student loan debts are all taxpayer backed, that money would come out of your pocket. Of course, short of massive debt forgiveness, this student loan debt will be a long-term drag on housing. And right now, the housing market needs more demand.

Analysis: Waning investor demand opens door for first-time U.S. home buyers

By Margaret Chadbourn — Fri Sep 6, 2013 2:00pm EDT

(Reuters) – Wall Street’s billion-dollar bargain hunt for homes in depressed markets across the United States appears to have plateaued, potentially helping to cool the steep run-up in home prices and bring first-time buyers back into the market. 

As the housing sector reached bottom, hedge funds and private equity firms began raising money to snap up foreclosed homes with the intent to rent them out for several years and unload them at a profit once prices rose far enough.

These firms have spent billions of dollars over the last year buying up single-family homes in bulk, mopping up excess inventory in the market and pushing up home prices.

Sellers often jumped at their all-cash offers, rather than taking a chance on first-time homebuyers who would have needed to secure a mortgage, still a hard task for all but the most qualified buyers. Many banks holding foreclosed properties are often looking for a quick deal.

But with mortgage rates rising in anticipation of the Federal Reserve scaling back the generous stimulus to the economy it introduced during the financial crisis of 2007-2009, investors are pulling back.

As all-cash investors pull back, one of two things must happen: either first-time homebuyers must step up to fill the void, or sales volumes will crumble. Perhaps, as the article suggests, first-time homebuyers will no longer be shut out due to competition from all-cash buyers, but with prices much higher and borrowing costs much higher, many potential first-time homebuyers will be priced out the markets they want to buy in. Plus with the lack of employment, lack of a down payment, and excessive debt loads, many first-time homebuyers couldn’t step thorugh the door of their own house if they wanted to.

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4 CARNELIAN Irvine, CA 92614

$945,800 …….. Asking Price
$684,000 ………. Purchase Price
6/26/2003 ………. Purchase Date

$261,800 ………. Gross Gain (Loss)
($75,664) ………… Commissions and Costs at 8%
============================================
$186,136 ………. Net Gain (Loss)
============================================
38.3% ………. Gross Percent Change
27.2% ………. Net Percent Change
3.2% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$945,800 …….. Asking Price
$189,160 ………… 20% Down Conventional
5.17% …………. Mortgage Interest Rate
30 ……………… Number of Years
$756,640 …….. Mortgage
$202,820 ………. Income Requirement

$4,141 ………… Monthly Mortgage Payment
$820 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$197 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$82 ………… Homeowners Association Fees
============================================
$5,240 ………. Monthly Cash Outlays

($1,177) ………. Tax Savings
($881) ………. Principal Amortization
$386 ………….. Opportunity Cost of Down Payment
$138 ………….. Maintenance and Replacement Reserves
============================================
$3,705 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$10,958 ………… Furnishing and Move-In Costs at 1% + $1,500
$10,958 ………… Closing Costs at 1% + $1,500
$7,566 ………… Interest Points at 1%
$189,160 ………… Down Payment
============================================
$218,642 ………. Total Cash Costs
$56,700 ………. Emergency Cash Reserves
============================================
$275,342 ………. Total Savings Needed
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