From USA Today:
Headlines about skidding home sales and prices portray a buyer’s market for real estate. For first-time buyers, though, the view is quite different. For them, the market is more challenging now than at any time since the early 1990s.
Rising mortgage rates have eroded almost all the financial relief that buyers might have derived from the slight decline in prices in most areas. On top of that, lenders are now demanding that customers produce larger down payments, more cash reserves in the bank, higher credit scores and less debt — all of which many first-time buyers lack, especially in high-cost states such as California, New York and Florida.
Nearly half of first-time home buyers nationwide last year put down no money, according to the National Association of Realtors, compared with fewer than one in five repeat buyers. The remaining first-time buyers put down a median of just 2% of the purchase price.
“I could put anybody in a loan last year,” says Stephanie Gagnon, a senior loan officer at First Capital Mortgage in San Diego. But, “In the last six months, all of the big lenders are shutting down all special programs they were working with because they’ve realized it’s bitten them.”
Now, she says, “I’m turning away 50% of my first-time home buyers. They just can’t qualify.”
As lenders raise their standards for borrowers, the squeeze on first-time home buyers is constricting the broader real estate market and slowing the recovery. That’s because about one in three homes sold last year went to a first-time buyer. As these first-timers are shut out of the market, sellers ready to move up to bigger houses have a harder time selling their homes.
“The decrease in sales at the lower end of the market has been kind of a surprise,” Shuffield says. “That’s usually where we have the greatest number of buyers. It’s tougher for first-time buyers to save deposits and come up with the cash necessary to close” a sale.
Which is why Chad Moskal, 33, an account executive at a printing company, gave up his apartment on the beach in Miami last summer and moved back in with his parents in Chicago. He and his brother Paul, 34, who’s working two jobs as a cardiovascular technologist and has also been living at home, are buying their first house together this month. A home in Chicago, Chad Moskal decided, would be cheaper to buy than a similar one in Miami.
The number of people who are moving in with friends or family, or sharing apartments or houses to save money, has caught economists at the Realtors association off-guard. The growth in “new households” — first-time buyers or first-time renters — has plunged 70% from last year’s rate.
“This is very unusual,” says Lawrence Yun, the NAR’s senior economist. “Even during a recession, household formations do not slow to this current level.”
Last year, about one in 10 first-time home buyers tapped their fledgling retirement or pension accounts to help come up with a down payment, according to the NAR. And that was back when mortgage companies seemed to be giving loans to anyone with a pulse.
To scrounge up a 5% down payment, Rey and his wife sold their cars and cashed out the entire $36,000 Rey had socked away in his 401(k). To keep their monthly payments low, they took out a loan that lets them pay only the interest for the first five years. They’re taking a calculated risk, though, that the value of their condo will rise. With their interest-only loan, Rey and his wife will owe the same principal balance in five years. And their mortgage will reset, possibly to a higher interest rate.
“You’re wiping out your retirement, and if that’s the only money you have for a home, maybe you shouldn’t be buying a home,” says Ed Slott, an accountant and IRA expert in Rockville Centre, N.Y. And after that money is gone, “What if the roof leaks, then what are you going to do? This is just the beginning” of the expenses of owning a home.