Home » First Time Homebuyers Are Disappearing — And That’s a REALLY Bad Sign

First Time Homebuyers Are Disappearing — And That’s a REALLY Bad Sign

by Chris Poindexter

It’s hard to work up much sympathy when you hear corporate executives lamenting about some economic problem that’s holding their business back. After all, they’re getting a seven-figure bonus to solve those kinds of problems — we should all have it so rough. Most of the time it’s just a public display of angst, the televised equivalent of the Japanese Badge of Shame that under-performing workers have to wear around the office. It usually means that division didn’t make its quarterly numbers, and the executive in charge is getting out in front of the bad news.

Every so often one of these public mea culpas has a nugget of insight that warrants greater scrutiny. Like when the chief executive of Berkshire Hathaway’s real estate division starts frumping about a lack of first-time homebuyers; that’s a coal mine canary gasping for breath that the rest of us should look at more closely.

According to Trulia, in 2009 first-time homebuyers accounted for 47% of the market; typically that number is around 40% of the market. Even the National Association of REALTORS (NAR), the housing industry cheerleader, admits that the percentage of first time buyers has slumped to 31%, and more recently down to 25-28%. That’s a huge chunk of home sales that has simply vanished.

Part of that disappearing act is due to bottom-feeding investors scooping up entire neighborhoods and turning them into home rentals. They don’t buy homes through the retail housing market like you and I; they have their own lawyers and support staff to handle the closing and paperwork and they don’t, for the most part, use real estate agents. All the competition for rentals tends to drive up prices at the lower end of the market, and there is a shortage of starter homes at affordable prices.

imageCouple the shortage of starter homes with fewer young people forming households, couples saddled with years of crippling student loan debts, and newer tight lending standards, and it’s not hard to account for the lower numbers of first-time buyers. The loss of a key market segment is dragging down the entire industry. Mortgage applications are down 21% from this time last year. Imagine trying to run your business when 1-in-5 customers suddenly vanishes.

In March the US Department of Commerce reported that home sales fell to an eight-month low, to 384,000 units. While the bad winter weather is getting most of the blame, the Commerce Department numbers are seasonally adjusted; and while there is some evidence buyers have started drifting back to the housing market, they’re not coming with the enthusiastic numbers of the past.

The Federal Reserve recognizes the seriousness of the problem, with chairperson Janet Yellen noting that while the economy remains on track for solid growth, the Fed is keeping a close eye on the housing market, calling its current performance “disappointing” — and promising to keep the spigot open on cheap money for the foreseeable future.

The reason the housing market is causing so much angst in financial circles is that it’s such a big part of the economy, and there are signs the current miasma might be permanent — though it’s still too early to say for sure. What many tend to forget is that while housing numbers are improving, they’re coming back from pitch black.

Housing currently accounts for just over 3% of our entire GDP. Compare that to 2006, when housing accounted for almost 7%, and you begin to see the problem. Purchases of new homes sank 14.5% in seasonally-adjusted numbers since February. When there are no new homes there are no building permits; the tax base shrinks, and there are fewer jobs in home construction. Think about 4% of our entire economy disappearing, and the implications are staggering.

Americans taking a more jaundiced view of housing as an investment is a positive development; and new buyers staying out of the market until they get a better deal was inevitable. But that doesn’t mean there won’t be some short-term economic pain until we sort out a new equilibrium for housing going forward.

It’s funny that in all the discussions about how to prop up the housing market, no one ever talks about making the whole process a better deal for consumers.

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