| Jul 11, 2018 12:45 ET Subscribe to our weekly e-newsletter, Top News.|
Inventory crunch squeezes out first-time homebuyers
Existing-home sales have flagged this year, despite a booming economy and fierce competition among buyers. The reason isn’t a mystery, according to the National Association of Realtors (NAR). First-time homebuyers have been locked out the housing market to a large degree.
A critical shortage of entry-level listings has translated into lower sales of homes priced under $250,000, the pool of homes that most first-time homebuyers buy, according to NAR.
In May, home sales rose solidly in the four price categories of properties above $250,000, compared to a year ago, NAR data suggests. But sales were down year-over-year in May by 18 percent for homes priced under $100,000 and declined by 5.6 percent for homes priced between $100,000 and $250,000.
This lower end of the market represents nearly 50 percent of all existing sales, according to NAR. Homes priced in the $100,000-$250,000 range account for 40 percent of all sales, the single largest sales price pool.
“That tells you quite a bit,” said George Ratiu, NAR’s managing director of Housing & Commercial Research. “It says that at the lower price ranges, No. 1, inventory is extremely tight and, No. 2, it is now impacting sales, which have declined in those lower-priced ranges.”
Ratiu said this story was playing out in all regions of the country, but the most seriously in the high-priced markets. Ratiu said the expensive West region, for example, saw the steepest decline in sales of entry-level properties, with sales of properties priced under $100,000 down 38.5 percent, and sales in $100,000-$250,000 range down about 25 percent.
“In my view, that tells quite a bit about the story, and the impact it has on first-time buyers,” Ratiu said.
Other tracking data, including NAR’s surveys, have suggested that millennials have been active in the market, however. Last year, NAR estimated that millennials were the largest group of active buyers for the fourth consecutive year. Millennials were the buyers in roughly a third, or 34 percent, of all home sales.
Ellie Mae's millennial tracking data suggests that younger buyers have become a dominant force, although they would perhaps be more so, if there were more lower-priced homes to buy.
“Our data shows that many millennials are representing a greater percentage of the total homebuyers in all metropolitan areas,” said Joe Tyrrell, executive vice president at Ellie Mae. Tyrrell noted, though, that the share of homes bought by millennials in rural areas has grown at a faster rate than in metros areas, suggesting that the lower cost of homes, less competition among buyers and higher inventories in rural areas are a factor.
Tyrrell said just a fraction of the estimated 24 million millennials who will reach homebuying age by 2021 have yet to buy homes.
A declining share of Federal Housing Administration (FHA) loans also may point to the struggles of first-time homebuyers, according to Attom Data Solutions. Looser underwriting and the lower downpayment option have made FHA traditionally popular with new homebuyers. The FHA share has been declining, however, and stood at just 11.9 percent of homes bought with FHA loans in the first quarter, the lowest share in four years and the third lowest since the 2008 recession, Attom reported.
Attom Data senior Vice President Daren Blomquist also said first-time buyers tend to be the ones hurt by rising prices for the simple reason that they aren’t accumulating equity. The existing homeowner is building equity. That means, if a homeowner should sell, they will have more money to put down on a home. The first-time homebuyer is thus at a disadvantage if they are bidding against an equity-rich homebuyer.
“The faster home prices rise, especially if wages are not keeping up, the further these prospective homebuyers fall behind on the affordability treadmill,” Blomquist said. “For current homeowners moving up, rising home prices means they have rising home equity in their current home that should be at least roughly keeping pace with the rising home price of their future home.”
NAR estimated that first-time homebuyers accounted for 31 percent of buyers in May, down from 33 percent in April and a year earlier. Ratiu said the share of first-time buyers last year ran about six percentage points below the 40 percent share considered normal. Ratiu was skeptical that this would change soon.
“The builders have obviously been slow to ramp up construction for various reasons,” Ratiu said. “In the absence of new supply, and given that buyers are still interested in purchasing, this is going to continue to put pressure on prices. With that strong price increase, especially coupled with the mortgage rates increasing as well, it is going to squeeze first-time buyers the most.”