The Plight of First-Time Buyers

First-time buyers are a shrinking share of the market, but there are a few things that can be done to help reverse this trend.

March 19, 2014

It’s not a $64,000 question, but rather a $41,000 one. “Where are the first-time buyers?” It’s important because $41,000 is the amount renters have missed out on by not buying three years ago when prices were at a low point. The annual median home price was $166,100 in 2011 and $197,100 in 2013. The median national home price this year is expected to hit $207,000. Money left on the table.

Unfortunately, our most recent data show first-time buyers are a shrinking share of the market, only about 27 percent of buyers, compared to 40 percent in a more normal market. It’s not that young households don’t want to buy. It’s that desire is not matching up with their ability. Many young households are saddled with student loan debt while job creation and wages have been heading up only slowly. And the qualified mortgage rule that took effect this year to ensure lenders don’t make bad loans won’t help, since it tightens how much student loan and other debt loan applicants can carry.

This situation is worrisome, because all of the recent growth in household formation has been among renters. Unless a healthy portion of today’s 40 million renter households become home owners, the housing market cannot grow much.

There are two fronts to be tackled if first-time buyers are to get back to more normal levels. First, we must monitor the impact of the QM rule on otherwise qualified buyers to see if lenders are being too risk averse. There’s reason to think they are, because mortgage default rates have been at historic lows in the last few years. That suggests lenders have restricted underwriting too much in anticipation of QM. Second, builders need to step up home building, bringing construction  levels closer to historical norms. More inventory helps tame price growth, and it gives buyers something they don’t have much of now: selection.

The bottom line: Housing is underperforming. In 2000, when the market was boring, with no bubble and no crash, there were 5.2 million existing-home sales and 1.6 million housing starts. Today, home sales are struggling to reach 5 million annually and new starts total only about 1 million, yet the country has 34 million more people and mortgage rates remain historically low. Those on the sidelines are missing out.

Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Yun oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.3 million REALTOR® members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has appeared as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website and The Hill, an “inside the beltway” publication on public affairs.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.