From the WSJ:
Economists, real-estate agents and many home builders expected first-time and entry-level buyers to begin returning to the market this year, jump-starting the sputtering housing recovery. So far, that hasn’t happened.
Less buying at the market’s lower end by first-time buyers has contributed to limiting sales of existing homes so far this year to a pace of roughly 88% of their 10-year average. It’s also a factor in stunting sales of newly built homes to a pace of roughly 60% of their annual average since 2000.
Some economists now predict that tight lending standards, high prices and the sluggish economic recovery will keep first-timers from returning in full force for several years. That likely means a slower pace for the housing recovery, already a drag on the broader economy in the past year.
“We likely have hit the bottom in the past six months or so regarding the lack of participation of first-time buyers,” said Lawrence Yun, chief economist for the National Association of Realtors. “It may take three years to return to normal first-time-buyer participation.”
Myriad other factors have dogged first-time buyers in recent years. According to Census data, Americans from 25 to 34 years of age experienced the biggest decline in income—9%—of any age group from 2007 to 2012 other than people younger than 25. Many also are grappling with student debt that crimps their cash flow.
What’s more, there are fewer affordable homes available for first-timers to purchase. Nationally, the median price of an existing home has increased by 5.2% in the past year to $201,700. The median price of a newly built home registered $275,800 in April, down 1% from a year earlier.
The surest route to normalcy for the housing market is for first-time and entry-level buyers to rebound, economists say.
First-time buyers now account for about 16% of new-home purchases, down from a range of 25% to 28% between 2001 and 2007, according to the National Association of Home Builders. In the existing-home market, first-timers accounted for 29% of purchases in April, according to the Realtors association. That’s down from their monthly share exceeding 40%, and occasionally surpassing 50%, in 2009 and 2010 when a federal tax credit for first-time buyers was offered.
The dynamics could stunt the entry-level market and broader economy for years to come. Economists believe younger Americans now are much more likely to rent for longer periods than did earlier generations—due not only to the rising home prices and high credit standards but also the high student debt levels and elevated levels of underemployment.
Mark Zandi, chief economist at Moody’s Analytics, expects a “slow build” in first-time and entry-level home purchases starting this year. But “there are several headwinds,” he said, pointing to elevated levels of unemployment among younger workers and high levels of student-loan debt. “They’ve had a tough financial time.…I’m sure they’re psychologically scarred by the economic roller-coaster of the last 10 years.”
On the bright side, housing-market observers note that U.S. job growth is improving, mortgage-lending standards are loosening ever so slightly and many young adults likely are getting weary of living with roommates or their parents.