Why is this happening?
Despite an improving job market and low interest rates, the share of first-time buyers fell to its lowest point in nearly three decades and is preventing a healthier housing market from reaching its full potential, according to an annual survey released by the National Association of REALTORS® (NAR). The survey additionally found that an overwhelming majority of buyers search for homes online and then purchase their home through a real estate agent.
The 2014 National Association of Realtors® Profile of Home Buyers and Sellers continues a long-running series of large national NAR surveys evaluating the demographics, preferences, motivations, plans and experiences of recent homebuyers and sellers; the series dates back to 1981. Results are representative of owner-occupants and do not include investors or vacation homes.
The long-term average in this survey, dating back to 1981, shows that 4 out of 10 purchases are from first-time homebuyers. In this year’s survey, the share of first-time buyers dropped 5 percentage points from a year ago to 33 percent, representing the lowest share since 1987 (30 percent).
Lawrence Yun, NAR chief economist, says there are many obstacles young adults are enduring on their path to homeownership. “Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who have experienced limited job prospects and flat wage growth since entering the workforce,” he explains. “Adding more bumps in the road, is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums.”
Yun adds, “Stronger job growth should eventually support higher wages, but nearly half (47 percent) of first-time buyers in this year’s survey (43 percent in 2013) said the mortgage application and approval process was much more or somewhat more difficult than expected. Less stringent credit standards and mortgage insurance premiums commensurate with current buyer risk profiles are needed to boost first-time buyer participation, especially with interest rates likely rising in upcoming years.”
The household composition of buyers responding to the survey was mostly unchanged from a year ago. Sixty-five percent of buyers were married couples, 16 percent single women, 9 percent single men and 8 percent unmarried couples.
The median age of first-time buyers was 31, unchanged from the last two years, and the median income was $68,300 ($67,400 in 2013). The typical first-time buyer purchased a 1,570 square-foot home costing $169,000, while the typical repeat buyer was 53 years old and earned $95,000. Repeat buyers purchased a median 2,030-square foot home costing $240,000.
When asked about the primary reason for purchasing, 53 percent of first-time buyers cited a desire to own a home of their own. For repeat buyers, 12 percent had a job-related move, 11 percent wanted a home in a better area, and another 10 percent said they wanted a larger home. Responses for other reasons were in the single digits.
According to the survey, 79 percent of recent buyers said their home is a good investment, and 40 percent believe it’s better than stocks.
Financing the Purchase
Ninety-three percent of entry-level buyers chose a fixed-rate mortgage, with 35 percent financing their purchase with a low down payment Federal Housing Administration-backed mortgage (39 percent in 2013), and 9 percent using the Veterans Affairs loan program with no down payment requirements. “FHA premiums are too high in relation to default rates and have likely dissuaded some prospective first-time buyers from entering the market,” says Yun. “To put it in perspective, 56 percent of first-time buyers used a FHA loan in 2010. The current high mortgage insurance added to their monthly payment is likely causing some young adults to forgo taking out a loan.”
Searching for and Buying a Home
Buyers used a wide variety of resources in searching for a home, with the Internet (92 percent) and real estate agents (87 percent) leading the way. Other noteworthy results included mobile or tablet applications (50 percent), mobile or tablet search engines (48 percent), yard signs (48 percent) and open houses (44 percent).
According to NAR President Steve Brown, although more buyers used the Internet as the first step of their search than any other option (43 percent), the Internet hasn’t replaced the real estate agent’s role in a transaction.
Ninety percent of homebuyers who searched for homes online ended up purchasing their home through an agent,” explains Brown. “In fact, buyers who used the Internet were more likely to purchase their home through an agent than those who didn’t (67 percent). Realtors® are not only the source of online real estate data, they also use their unparalleled local market knowledge and resources to close the deal for buyers and sellers.”
First-time buyers plan to stay in their home for 10 years and repeat buyers plan to hold their property for 15 years; sellers in this year’s survey had been in their previous home for a median of 10 years.
The biggest factors influencing neighborhood choice were quality of the neighborhood (69 percent), convenience to jobs (52 percent), overall affordability of homes (47 percent), and convenience to family and friends (43 percent). Other factors with relatively high responses included convenience to shopping (31 percent), quality of the school district (30 percent), neighborhood design (28 percent) and convenience to entertainment or leisure activities (25 percent).
This year’s survey also highlighted the significant role transportation costs and “green” features have in the purchase decision process. Seventy percent of buyers said transportation costs were important, while 86 percent said heating and cooling costs were important. Over two-thirds said energy efficient appliances and lighting were important (68 and 66 percent, respectively).
NAR mailed a 127-question survey in July 2014 using a random sample weighted to be representative of sales on a geographic basis. A total of 6,572 responses were received from primary residence buyers. After accounting for undeliverable questionnaires, the survey had an adjusted response rate of 9.4 percent. The recent home buyers had to have purchased a home between July of 2013 and June of 2014. Because of rounding and omissions for space, percentage distributions for some findings may not add up to 100 percent. All information is characteristic of the 12-month period ending in June 2014 with the exception of income data, which are for 2013.
For more information, visit www.realtor.org/prodser.nsf/Research