Monday, March 28, 2011

Fewer first-time home buyers hurt market

Many first-time home buyers are sitting on the sidelines of the U.S. housing market, hampering its ability to gain traction.

Last month, 34% of existing-home purchases were made by first-time buyers, according to the National Association of Realtors. In January, they were 29% of the market, the lowest since NAR surveys started tracking them monthly in late 2008.

In healthy markets, first-time buyers make up 40% to 45% of all purchasers. They play a critical role in buying starter homes so those owners can buy more expensive homes.

Despite low mortgage rates and falling prices in many markets, existing-home sales have been weak for months and were down 2.8% in February from a year ago.

MORE: Real Estate front page

What’s keeping more first-timers at bay:

Expired tax credits. Federal credits boosted home sales in 2009 and 2010 and lured some first-time buyers into the market sooner than normal, says Lawrence Yun, NAR chief economist. The credits expired in April. Last March, 48% of buyers were first-timers, Inside Mortgage Finance data show. “It’ll take some time to rebuild that pipeline,” Yun says.

Lending standards. Tighter lending standards since the housing bust are edging out first-timers who can’t meet credit or employment history requirements in a still-weak economy, says Guy Cecala, publisher of Inside Mortgage Finance.

Higher credit standards are reflected in loans bought by government-backed mortgage giants Freddie Mac and Fannie Mae. Last year, loans in Freddie Mac’s portfolio had an average credit score of 758, it says. That was up from 720 five years ago.

Many lenders are also requiring higher down payments, says Greg McBride, senior analyst at The best terms kick in with 20% or more down. Higher down payments are driving more buyers to Federal Housing Administration loans. The FHA requires as little as 3.5% down for borrowers with good credit scores. In fiscal year 2010, FHA loans were 19% of the home purchase market vs. 14% a decade before.

Competition. In February, cash buyers accounted for a record 33% of existing-home sales, NAR says. In some areas, including Southern Nevada, cash buyers now account for more than half of existing-home sales. Sellers often prefer cash offers because they’re more likely to close, says Realtor Jerry Abbott of Grupe Real Estate in Stockton, Calif. He recently had one listing with six offers: one cash, two with 20% down payments and four FHA, which often means first-time buyers.

“The seller didn’t even consider the FHA” offers, Abbott says.

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