First-time homebuyers come and first-time buyers go.
Historically, first-time buyers make up approximately 40 percent of purchasers in a given year, according to the National Association of Realtors. In 2010, spurred in large part by a federal tax credit of up to $8,000 for a first home purchase, first-time buyers flooded the market and accounted for half of all buyers, a record high.
But by 2014, a lack of incentives and tough economic realties had seemingly scared away younger buyers; first-time buyers accounted for just 33 percent of purchases last year, a near record low.
To this point, millennials – that is, adults aged 18-33 – have been slower to get into the homebuying game. Multiple factors have influenced that trend, including increased student debt and decreased post-college job opportunities.
“Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the work force,” Lawrence Yun, the NAR’s chief economist, said of the 2014 buying numbers.
Not only that but young people have been slower to settle down and get married in recent years. According to Zillow, the low rate of homebuying in millennials has not been due to a lack of desire for homeownership but instead due to the delay of marriage and children, a key factor in the decision to buy a home.
Overall economic factors, individual job prospects and personal life choices have all contributed to the lack of homebuying in the younger generation. However, things are starting to change for millennials.
According to the NAR, millennials in 2014 saw 60 percent better job growth as compared to the overall U.S. and unemployment has dropped to 6 percent. These improved economic conditions and the maturation of the generation should lead to an increase in homebuying. In fact, Realtor.com’s 2015 Housing Forecast suggested that millennials are more likely to buy a home in 2015 than any other age group. “The residual financial effects of recession-driven job losses and subsequent unemployment have impeded millennials’ entry into the home-owning market,” Jonathan Smoke, chief economist for Realtor.com, said in the forecast.
Part of the reason for the predicted uptick in first-time homebuying is the overall status of the housing market. To start, it is currently cheaper to buy than rent in many places. According to real estate site Zillow, home values will increase by 2.5 percent in 2015 but rentals will outpace that figure at 3.5 percent. As renting costs continue to rise, renters may seek the stability of fixed mortgage payments.
Brian Teyssier, an agent with RE/MAX Advanced Realtors in Pittsburgh, predicts that the disadvantages of renting may even cause young people to move up their five-year plan. “The increased rental fees coupled with low interest rates and the fact that FHA lowered their down payments – it’s a no-brainer for those people that were renting to move their plan up,” he says.
Though millennials are definitely looking to buy, some markets are better than others. The challenge is to find the right marriage of lifestyle preferences and affordability. According to the NAR, millennials tend toward urban environments with efficient mass transit systems. They also tend to value communities with a “work, live, play” vibe.
That said, home prices rose in 93 percent of metropolitan statistical areas measured by the NAR in the second quarter of 2015, with the national media existing home price up 8.2 percent over the previous year.
“Steady rent increases, the slow rise in mortgage rates and stronger local job markets fueled demand throughout most of the country this spring,” the NAR’s Yun said. “While this led to a boost in sales paces not seen since before the downturn, overall supply failed to keep up and pushed prices higher in a majority of metro areas.
“With home prices and rents continuing to rise and wages showing only modest growth, declining affordability remains a hurdle for renters considering homeownership — especially in higher-priced markets,” Yun added.
With high-priced urban markets continuing to offer limited affordable prospects, first-time homebuyers in search of less expensive housing will be better off in markets that offer both strong employment prospects and affordability.