Real Estate Investors and First-Time Buyers

Nearly 1.7 million buyers purchased a first home during the past year, a group central to the real estate market. There would be far fewer sales without them, and with reduced demand less ability to raise prices.

“While first-timers lack the equity existing owners can bring to the table, many are doing well,” said Rick Sharga, Executive Vice President with RealtyTrac. “Zillow reports that in 2019 the typical household income was $65,700 while first-time buyers took in $77,500. No less important, many first-timers augment their finances with money from friends and family, mortgages with little down, and by purchasing with help from down payment assistance programs.”

Importantly, there are a lot of first-time buyers. They represent about a third of all existing home transactions today, something real estate investors and property owners in general won’t want to ignore when it’s time to sell.

Who is a first-time buyer?

It might seem that the definition of “first-time buyer” is fairly obvious, but that isn’t always the case. For instance, Freddie Mac says someone can be a first-time borrower even if he or she “had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase.” Other special rules can also apply.

The disappearing first-time buyer

First-time buyers represent a large share of the existing home market. According to the National Association of Realtors (NAR), in 2021 “82% of buyers 22 to 30 years and 48% of buyers 31 to 40 years were first-time home buyers. Behind these groups, 22% of buyers 40 to 54 years were also first-time home buyers.”

First-timers, as a group, plainly do not have the financial resources enjoyed by those who own or have owned real estate. NAR figures show that in 2021 the median down payment was 7% for first-time purchasers versus 17% for repeat buyers. The important point is that even with less down, first-timers can become buyers, people who make sales happen.

Affordability

Homes have become less and less affordable, especially during the past two years, and the impact from higher prices is plainly visible.

In 1981, according to NAR, first-timers represented 44% of all existing purchasers as compared with 34% in 2021. In the same years, first-time buyers got older (29 years versus 33 years), repeat buyers got far older (36 years versus 56 years), and typical down payments shrank (20% versus 13%).

The year 1981 not only had a lot of first-time buyers, it also had steep interest rates. Really steep. According to Freddie Mac, the annual interest rate in 1981 was 16.63%, the highest on record.

First-time buyer activity is down even further as we move toward 2022. The latest available data shows that first-time buyers represented 29% of October existing sales and just 26% in November, according to NAR.

Given annual sales of roughly 6.46 million existing units this year — the annual projection reported by NAR for November – 26% of the market equals nearly 1.7 million first-timer transactions.

First-time buyer programs

The real estate market is not especially welcoming to first-time buyers. Home prices were up by double digits in both 2020 and 2021 so down payment cash requirements have increased. Interest rates at year-end were on the rise, not by much but still higher. Debt is a big qualification problem for many borrowers. And, perhaps most importantly, income certainty is an issue for everyone in a pandemic economy.

No doubt many buyers are overwhelmed when they look at the market, but there are ways for them to become owners and also very good reasons to do so: the Federal Reserve says that property owners had a median net worth of $255,000 in 2019 versus $6,300 for renters.

The way to create more first-buyers – the way to return to the first-time market share seen in past years – is to show that the down payment hurdle is surmountable. Here’s how:

• The FHA program is open to buyers with 3.5% down and credit scores as low as 580. Almost 85% of FHA forward-loan borrowers are first-timers – that’s more than 715,000 loans in fiscal 2021.
• The VA makes financing available to qualified vets with zero down. In addition, the VA’s up-front funding fee can be rolled into the mortgage amount, a big cash reduction for borrowers.
• With the USDA program, explains TheMortgageReports, “buyers can finance 100% of a home’s purchase price while getting access to better–than–average mortgage rates. This is because USDA mortgage rates are discounted as compared to other low–down payment loans.”
• Financing with just 3% down is available to qualified borrowers through the HomeReady (Fannie Mae) and Home Possible (Freddie Mac) programs.

Down payment assistance programs

In addition to savings, there are a wide assortment of down payment assistance programs. These programs – which are often very favorable for qualified first-time buyers – can include outright grants, interest rate reductions, state and local tax benefits, and forgivable second mortgages. More than 2,000 down payment assistance programs are listed by location at the Down Payment Resource webpage.

Also in the assistance “category” are such sources as help from Mom and Dad, companies, unions, and nonprofit organizations.

What is the effect of mortgage programs with little down and lots of assistance for first-time buyers? Think of those 1.7 million transactions, a number that makes the first-time buyer market worth exploring.