Numbers don’t lie. It used to be that 40 percent of the resale market was populated with first-time buyers, according to the National Association of Realtors. By April of 2012, in the wake of the foreclosure crisis, the number had drifted down to 28 percent. That’s a huge drop. We think it’s worthy of further exploration. Luckily, someone already did.
We could stand here blindfolded and throw darts at the wall all day but, instead, let’s turn to Zillow economist (and not former San Diego Chargers quarterback), Stan Humphries. What about it, Stan? Where did the first-time home buyers go to? Humphries points to three reasons.
High Down Payment Requirements
Ten years ago, financing to buy a new home was fast and loose. Down payments ranged from five percent all the way down to nothing. The end result of all this government-induced lending insanity was, predictably, the foreclosure crisis that began in 2006 and continues today. One of the most noticeable effects of the hangover is that most lenders require at least 20 percent down for a home mortgage today, and some have pushed that all the way up to 25 percent. For recent college graduates with mountains of education loan debt, the numbers simply don’t add up.
The Underwater Problem
Another bit of fallout from the foreclosure crisis is a large percentage owners of start-up homes find themselves “underwater” on their mortgage. This means they owe more on the loan than the house is worth on the open market. Obviously, many are opting to hold onto their house rather than sell it, and keep their fingers crossed that the market recovers enough to put them back into the land of profitability. Until then, there’s not much they can do except hunker down and hold onto their property, which removes many of the affordably-priced options from the market. Strike two against first-time home buyers.
Deep Pocketed Investors
The last problem Humphries points to is the presence of real estate investors with lots of cash. This type of buyer swooped in when the market tanked and has been buying up every low to moderately priced house in sight ever since. First-time home buyers are having a hard time competing with that kind of cash.
What does all this mean to us as income property investors? It’s a good thing, according to Jason Hartman. Every person that isn’t a home owner is going to be renting, unless they have moved back in with dear old mom and dad, and for us, the more renters the better. (Top image: Flickr | danielmoyle)
* Read more from Commercial Investing
The Commercial Investing Center Team