Americans Shut Out of Home Market Threaten Recovery: MortgagesPrashant Gopal and John Gittelsohn
Kirk Rohrig is concerned he may soon join the growing ranks of Americans shut out of the housing recovery and the financial benefits that spring from it.
Rohrig, who is unmarried, began hunting in November for his first home in Portland, Oregon, where cash buyers are driving up property prices. The software support specialist earns about $55,000 a year, has a high credit score of 790 and can’t find anything worth buying for about $200,000.
“Even fixer uppers are out of my range,” Rohrig, 33, said. “I went to look at a house that was garbage. There were cracks around all the windows and full condensation on the inside. It was on the market for $225,000.”
First-time homebuyers hurt by rising prices and tougher credit standards are disappearing from the market, slowing the pace of the three-year recovery. The decline of these buyers, many of whom are young and non-white, also threatens to widen the wealth gap between owners, who benefit from appreciation, and renters, said Thomas Lawler, a former Fannie Mae economist.
“Potential first-time buyers weren’t able to take advantage of the high point in affordability and the low point in prices,” said Lawler, president of Lawler Economic & Housing Consulting LLC in Leesburg, Virginia. “So the wealth effect of the recovery hasn’t gone to what could have been new buyers.”
First timers accounted for 26 percent of purchases in January, down from 30 percent a year earlier, according to the National Association of Realtors. This January’s figure is the lowest market share NAR has recorded since it began monthly measurements in October 2008.
The decline of these buyers has hurt U.S. sales, which fell 5.1 percent in January from a year earlier, according to NAR. While purchases rose 8.2 percent for residences costing more than $250,000, they fell 10.7 percent for homes worth less.
“It’s a huge problem,” said Leslie Appleton-Young, chief economist for the California Association of Realtors. “We have a ladder of homeownership and need first-time homebuyers beginning the process of owning, building equity and trading up to have a healthy housing sector.”
The biggest challenge to cracking the housing market for first time buyers is that in much of the country home prices are rising faster than incomes.
The entry-level market was the first to rebound after the housing crash. It rose from a 2012 trough as Blackstone Group LP and other investors paid cash to absorb foreclosed homes to convert to rentals. In December, 47 percent of U.S. purchases were paid for with cash, up from 27 percent a year earlier and the highest level in data going back to at least 2005, according to a report yesterday by Black Knight Financial Services.
More owners of moderately priced homes are also becoming landlords, reducing the supply for first time buyers. Thirty-nine percent of owners looking for better homes plan to keep their current house as a rental, Redfin Corp., a Seattle-based brokerage firm, said in a report last month.
“Being a landlord was not something that many people looked forward to in the past and now that’s much more of a norm,” Redfin Chief Executive Officer Glenn Kelman said.
Younger buyers’ wealth has not bounced back as fast as the prices of homes. Americans under age 40 have only recovered a third of the wealth they lost after the recession began in 2007, while older households are back to pre-crisis levels, William Emmons and Bryan Noeth, researchers with the Federal Reserve Bank of St. Louis, said in a report last month.
The decline in affordability is acute in California. Single-family home prices jumped 20 percent last year to a median $438,040, and only 32 percent of households could afford the median-priced home, according to California Association of Realtors. That’s down from 48 percent in 2012.
“It certainly has made it very hard for first-time buyers,” Appleton-Young said. “How do you compete with all cash? You don’t.”
Rohrig, the software specialist, doesn’t have much cash for a down payment. So he plans to purchase with a loan from Key Corp., which provides up to 100 percent financing for buyers who qualify.
“I want to get in there as soon as I can because I have the feeling in another year or two it won’t be possible,” Rohrig said.
Higher mortgage costs are also a burden for first timers. Rates for 30-year fixed loans climbed to 4.37 percent last week from a near-record low of 3.35 percent in early May. The rate reached a two-year peak of 4.58 percent in August.
The Federal Housing Administration, the biggest source of financing for first-time buyers, has raised the cost of borrowing and tightened underwriting to cope with losses on mortgages it insured as the property bubble burst.
FHA borrowers pay an upfront fee of 1.75 percent of the loan balance and up to 1.35 percentage points in annual mortgage insurance premiums. The number of FHA borrowers purchasing their first homes declined by 38 percent to 550,000 last year from the 2010 peak.
Under a Housing and Urban Development pilot program, first-time buyers who go through housing counseling will get a discount on the mortgage insurance premium, FHA commissioner Carol Galante told reporters yesterday.
“We now have very strong evidence that housing counseling delivered by quality groups like HUD-approved counselors not only benefits the family but actually lowers the risk of default,” Housing and Urban Development Secretary Shaun Donovan said during the call. “We believe this initiative has a double benefit of expanding access to credit but also strengthening the FHA” insurance fund.
Lenders are requiring higher FICO scores, which can disproportionally impact first-time borrowers with short or bad credit histories. More than 40 percent of borrowers in 2013 had FICO scores above 760, compared with about 25 percent in 2001, according to a Feb. 20 report by Goldman Sachs Group Inc. analysts Hui Shan and Eli Hackel.
“Credit is not just tight relative to the peak years of the housing bubble, but also to most of recent U.S. housing history,” Shan and Hackel wrote. “Nearly five years after the end of the recession and with house prices 20 percent above the trough, we have seen few meaningful signs of easing in mortgage credit availability.”
Many possible first-time borrowers have stopped applying for loans. Applications for mortgages to buy homes in February fell 9 percent from the previous month to the lowest level since August 1995, according to an analysis of Mortgage Bankers Association data by Capital Economics Ltd. in London.
Logan Mohtashami, a senior loan officer with AMC Lending Group in Irvine, California, hasn’t gotten one pre-qualification application from a person younger than 35 since Jan. 1.
“They’re usually about 40 percent of buyers,” said Mohtashami, whose company has been lending since 1987. “This year, it’s so quiet. They’re not even getting started in the process.”
After reaching 50.1 percent in 2005, the homeownership rate for people in their 20s and 30s fell to 42.2 percent in 2013, the lowest in 19 years of Census data analyzed by Emmons and Noeth, the Fed analysts.
Those closed out of the market missed long-term gains in home equity that beat the stock market. Equity in a group of 46,000 homes purchased with median 3 percent down payments between 1999 and 2003 appreciated at a median annualized rate of 25 percent by the second quarter of 2013, according to a report by Roberto Quercia, professor of regional planning at the University of North Carolina at Chapel Hill. The equity on initial down payments of $1,950 increased a median $18,429 during the period of the study, according to Quercia.
The Standard & Poor’s 500 Index recorded an annualized rate of return of 3 percent between July 1999 and June 2013, according to data compiled by Bloomberg.
Stephanie Horchreder, 32, moved in with her mother last year to save money for a down payment. She had been looking for a three-bedroom house with a yard for a maximum $250,000 within a short commute of her job as a law enforcement 911 dispatcher near Denver.
Horschreder stopped house hunting in July, when bidding from competitors grew overheated. She started looking again in January, only to watch places she liked go into contract before she had time to submit a bid.
“Two years ago would’ve been the right time to buy, but I didn’t have the money,” she said. “Now I’m at the right point in my life and there’s nothing for me.”