Why Is The First Time Homebuyer Market Struggling? There are numerous reasons and below are a few:
1) Buybacks. It seems like the authorities are now forcing buybacks and fines over relatively minor errors, and as a result, lenders are refusing to extend credit to low-income / low FICO borrowers. Many first time homebuyers fall into the low-income / low FICO category. Of course the Administration continues to exhort the industry to loosen standards at the same time it announces record settlements.
2) Tougher on credit scores. Most first time homebuyers are young and nearly 70% of individuals under age 30 have FICOs less than 680. Lenders are tougher on lower credit borrowers, therefore hurting many first time homebuyers.
3) Tight lending standards have discouraged borrowers with low credit score from applying for mortgages. In the last year borrowers with FICO scores below 680 were rejected 6 times the rate of those with FICO score of 760 or above. This has caused a fear and a feeling of ‘why bother’ in many first time homebuyers.
4) The Qualified Mortgage Rule under Dodd-Frank. The Qualified Mortgage standards regulate borrowers’ total debt load can’t climb above 43% of their monthly income without being backed by Fannie Mae, Freddie Mac or a federal housing agency. This has taken some first time homebuyers out of the market.
5) Lack of excitement with appreciation. Prior to 2008 many first time homebuyers would follow the advice of their parents. That advice would be to buy a house. Even if they were only going to have it a short time the general feeling was it was a quick way to make some money. Prior to 2008 parents were much more willing to gift or lend their children money for a house, knowing it would be a great investment. Now that feeling has changed. Buying a home now is more of a long term investment and when many first time homebuyers are not sure how long they will be in a particular area, their excitement of owning a home declines somewhat.
So why is it important that the first time homebuyer market picks up? In a normal healthy housing market the first time homebuyer rate is roughly 40% of total housing. It currently stands around 30%. This hurts the whole housing market. Without the first time homebuyer the move up buyer is stalled, therefore affecting the entire housing market. If the housing market is not healthy the whole economy is negatively impacted.
What can be done to turn things around? Time will help. The further we get from the housing crisis the more things will improve. There has been a major over reaction from the government and this will let up eventually. It’s also a supply and demand issue. With all the refinances basically gone banks need more loans. Therefore, credit will loosen and new programs will become available.