story by Kim Souza
ksouza@thecitywire.com
First-time homebuyers are the catalyst for the rest of the housing market but this important demographic is shrinking nationwide according to a new report from the National Association of Realtors. It’s also shrinking in Northwest Arkansas.
First time buyers account for one-third of home purchases today, the lowest level since 1987, according to NAR Chief Economist Lawrence Yun.
“It's not just not as easy as it used to be for young adults to purchase a home,” Yun noted in the release.
He said rising rents and repaying student loan debt makes saving for a down payment more difficult for Millennials who have also experienced limited job prospects amid a slow recovering economy.
When factoring in rising home prices, higher mortgage insurance premiums and tighter credit, Yun said the result is fewer homes being sold to first time buyers. This missing demographic keeps others from being able to sell their homes and move up to a larger property as real estate is one industry with a trickle-up effect.
REGULATORY SQUEEZE
J.P. Sexton, mortgage banker at Centennial Bank in Fayetteville, said there is squeeze on first-time homebuyers and even veteran buyers seeking to refinance. It’s something he attributes to hyper regulation by the federal government. Sexton said there are plenty of downpayment assistance programs and ways to help buyers secure those funds, but the longer laundry list of criteria that must be met is burdensome and in many cases is not relevant to a person’s ability to pay.
The prime example Sexton shared is that of former Fed Chairman Ben Bernanke who recently sought to refinance his own home and was declined because of unstable income, since leaving his job. Sexton said it doesn’t matter that he’s got assets to cover the loan and in one speaking engagement can earn enough for a year’s worth of payments, the tighter rules kicked him out.
Sexton said the regulatory tightening has been increasing since 2008, and while buyers may initially hear they have been approved, when the underwriter gets through scrutinizing the bank statements, income tax returns, appraisals and other ancillary documents a loan offer can be snuffed out.
“I pity the buyer who has a successful garage sale and deposits $500 or $1,000 cash into their bank account and can’t prove where it came from. I have had borrowers hang up on me when I told them their loan was ultimately denied because of things like that,” Sexton said.
He said there is still a growing number of first-time buyers in this local market, but the average age is trending higher as many are waiting longer to buy.
Sexton said the majority of local market mortgage loans now require 5% down and are Fannie Mae backed. He said first-time buyers can pay 3.5% down with an FHA loan, guaranteed by the federal government. Both of these scenarios require private mortgage insurance which raises the monthly payment.
“A few years ago the majority of local mortgages were FHA, but today it’s almost always cheaper to use a conventional loan with 5% down,” Sexton said. “The reality is that some buyers just aren’t financially ready. We work with them too, so they can reach that goal if that’s their desire.”
REALTYTRAC REPORT
Irvine, Calif.,-based RealtyTrac looked at 512 U.S. counties with a combined population of 235 million and found that home affordability is often a hurdle for first time buyers.
To that point, Mel Watts, director for the Federal Housing Finance Agency, has talked recently about a need to “increase access for creditworthy but lower-wealth borrowers.”
This could be accomplished lower down payments for performing loans sold to Fannie Mae and Freddie Mac, which now require a 20% down payment to escape paying monthly mortgage insurance premiums. The lowest downpayment rate today for Fannie Mae is 5% but requires added mortgage insurance.
“While lower down payments may help pave a quicker path to homeownership for some prospective homebuyers, a bigger obstacle to homeownership is the additional non-mortgage debt many borrowers bring to the table,” said Daren Blomquist, vice president at RealtyTrac. “For borrowers without additional debt, monthly house payments are affordable in more than 90% of U.S. housing markets — whether they make a 20% or 3% down payment. But for borrowers with the additional debt burden of student loans and car payments, monthly house payments are affordable in less than half of U.S. housing markets with a 3% down payment.”
That said, lower down payment requirements do provide a lift over one major hurdle to homeownership. Blomquist notes that it would take an average of 12.5 years to save enough money for a 20% down payment at the current savings rate of 5.6%, reported by the Federal Reserve Bank of St. Louis.
LOCAL AFFORDABILITY
In Benton County, consumer households earning the median income of $52,891 would need to save for 9.2 years to make a 20% down payment on the median home priced at $136,000. For down payments of 10%, it would take 4.6 years for consumers to save enough money and at 3% down the time for saving is reduced to 1.7 years, according to RealtyTrac.
In Washington County, the savings time required for median income households ($41,716) to purchase a home at the median price of $180,000, is 15.4 years when making a 20% down payment. That is reduced to 7.7 years for a 10% down payment and 2.3 years for a 3% down payment on the median priced home.
Blomquist said both of these local markets are deemed affordable, even at the higher 20% down payment requirement as long as the borrower is not also carrying other debt such as new car loan or student loans.
The median monthly house payments in Benton County are $690, before taxes and insurance. In Washington County, the median house payment is $913, according to RealtyTrac.
Blomquist said home buyers with no debt could earn as little as $19,244 annually and qualify for a home loan in Benton County provided they have the down payment. In Washington County, given the higher home prices, the minimum income to cover the median payment is $25,470.
When factoring in the average new car loan and student loan debt, Blomquist said the income required to qualify for the median payment in Benton County rises to $41,347. In Washington County the income needed to cover the $913 payment would be $47,573.
Blomquist said the median incomes are high enough in Benton County to support the added debt levels and therefore this market is deemed affordable when other debt is held by household.
It’s a different story in Washington County. The median household income of $41,726 is not enough to support a $913 house payment and the average new car loan and student debt levels. There is a $5,846 deficit in this scenario.
BUYER PROFILE
The National Association of Realtors reports the median age of first-time buyers is 31, and their median income is $68,300. Their typical purchase is a 1,570-square foot home costing $169,000. The typical repeat buyer, by contrast, was 53, with an income of $95,000. Repeat buyers buy bigger and more expensive homes.
Home sellers are getting older at 54 years on average versus age 46 years in 2009. The typical seller has been in the house for 10 years, which is a new high. One reason noted for the older seller is that many of the Generation X homeowners were forced out of homeownership by foreclosures and short sales during the market bust between 2006 and 2009. The longer time spent in a home is linked to plummeting home values between 2007 and 2011, which holds many homeowners at bay as they try and recover lost equity.
Yun said better home values this year have allowed some homeowners to sell after waiting years for that opportunity.
“But if the share of first-time homebuyers continues to shrink, many homeowners who would like to move up to a more expensive house may find it harder to sell their current home,” Yun said.
Overall home ownership rates dipped to 64.4% at the end of the third quarter, lower than 65.3% reported a year ago and trending down this entire year, according to an Oct. 28 U.S. Census report.