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Are First Time Homebuyers Being Left Out Of The Current Housing Market?

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Mortgage and Lending with NONE

I came across an article by the associated press in the MSNBC Real Estate Section, back in October entitled "First-time homebuyers being left out."  The article went on to quote a poll stating that "Eighty percent of Americans believe it is difficult for most first-time buyers to afford a home, according to an AP-AOL Real Estate poll. Many people - 59 percent - believe the situation is worse now than five years ago." Even in the Midwest, the real estate market in my own backyard, over 50 percent of those first time homebuyers surveyed feel it is more difficult for first-time buyers to afford a home than it was five years ago. As I read this article, I chewed it, and swirled it around in my mouth, but I just couldn't swallow it, and I will tell you why.  

I personally feel you will never find a better time to purchase a new home than right now, and I want to bold and underline the fact that first-time-homebuyers can especially benefit from the current real estate market.  Sometimes first time homebuyers just need a little bit of help finding their way through all of the junk and misinformation out there about mortgages.

First of all NAR Statistics have been saying, that "The share of first-time home buyers dropped earlier this year to its lowest level since 1987,"  but now a Wall Street Journal Article by Rush Simon is saying "First-Timers are looking at homes again!"  It's a lot of confusion if you ask me, especially for first time homebuyers who are already intimidated by a confusing process they have never experienced before, but the truth is simple.

Interest rates are still at historically low levels.  As of the time I am writing this post, they are hovering right around 6.00% for a 30 year fixed mortgage.  According to Freddie Mac the average 30 year mortgage rate in July 1976 was 8.93%, in July 1986 it was 10.51%, and in July 1996 the average 30 year fixed mortgage rate was 8.25%.  So what if they are a little bit higher than they were last year or the year before, they are still lower than they have been in 30 years!  To be fair though, the article claims that many first time homebuyers feel it is more difficult to afford a home than it was just 5 years ago.

According to Freddie Mac, the average 30 year mortgage rate in 2000 was about 8.05% so the mortgage on a $113,900 loan in 2000 (the median home price) would be about $835 per month.  Even though median house prices are about 32% higher today than they were in the year 2000, interest rates are about 2% lower.  This means a $113,900 home in the year 2000 would cost about $167,500 today. (Current median home value)  So a $167,500 loan would have a 2% lower interest rate today, and a monthly mortgage payment of only about $1004 per month!  A whole $169 more than 5 years ago!  According to Census Bureau statistics, the median household makes about $4,336 more in 2005 than they did in 2000.  Now I am no economist and I don't want to get into a statistical debate about inflation, but I think it is safe to say that the cost of every other durable good and service didn't rise at the same rate as median housing prices. In fact the Consumer Price Index or CPI which measures the cost of several goods and services, among them the cost of housing (rent, mortgage payments, utilities, and furniture) only increased by about 13% over the same time period.  This is much more in line with the roughly 10% increase in median household income over the same time period.  To make a long story short, even though the median price of a new home has increased, low interest rates and relatively low inflation has kept housing prices extremely affordable.  This is before we even take into consideration the introduction of all the new mortgage programs that were either not available or not widely used in 2000.  Options like the 40 and 50 year term mortgages, interest only options and low minimum payment "option arms."

Which brings us to the next reason;  There are thousands of new mortgage products introduced every day that help make home loans more affordable for first time homebuyers.  We are in the generation of 40 and even 50 year mortgages, Interest only, and negatively amortizing "pay-option arms."  These programs make affording a mortgage payment very cheap in many cases.  Not to mention the myriad of zero down loans available have all but eliminated the need for a large down-payment.

First time homebuyers also find themselves with a lot of options not previously available to 1st time homebuyers in the past.  They can get into a home with little or zero money out of their pocket.  Zero down loans are very easy to qualify for these days, and FHA, Fannie Mae, and Freddie Mac offer affordable loan solutions that allow homeowners to buy a home with little or zero down.  There are also a number grants available, like the American Dream Down-payment Initiative that offer qualified first time homebuyers up to $10,000 in down-payment and closing cost assistance to cover their out-of-pocket expenses on the loan.  Finally in this market, with housing inventories growing and growing, many sellers are desperate and will often agree to pay for all of a buyer's closing costs, or other costs in order to entice them to purchase a home.

Homes are actually more affordable than you think in some markets. While median home prices have risen sharply in the last 5 years, we are now starting to see a cooling in many markets, and in some areas even depreciation in home values.  Certain areas of the country are already very affordable. Houses in my market in Michigan are some of the most affordable in the country.  According to the National Association of Homebuilders/Wells Fargo Opportunity Index, Michigan cities lead the nation in housing affordability.  It seems like a contradiction to for 51% of people in the Midwest to feel that housing is not affordable, but to have the Midwest lead the nation in affordably priced housing.

Finally if everything above isn't enough to show that a first time homebuyer will never find a better time than right now to purchase a home, consider these last two pieces of information in parting.  A mortgage on a decent size "starter-home" in most real estate markets, not only is often just as affordable as paying rent, but you can deduct mortgage interest you pay toward your home loan on your income taxes at the end of the year.  The tax savings alone is enough for most people to consider owning vs. renting.

Comments(4)

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Chris Tesch
RE/MAX Bryan-College Station - College Station, TX
College Station, Texas Real Estate
Joshua, I've found it to be almost too easy to get first time buyers into homes these last few years.  Mortgage practices had relaxed almost to the point of me wondering if I should get the buyer into a home, thinking they might not keep it afterwards.  I had a low 600 score FTHB that was almost talked into not escrowing taxes and insurance.  This was a 100% loan with the seller contributing 3% towards closing cost.  I fought that one and made sure that they at least escrowed.  These people wouldn't have been in the house for a year and a half without getting into trouble. 
Dec 19, 2006 06:27 PM
Rich Jacobson
Fathom Realty West Sound - Poulsbo, WA
Your Kitsap County WA Real Estate Broker
Josh, I totally agree with you. In our market here, there has never been a better time. Rates are down, the market has cooled, making Sellers more generous in paying closing costs and lowering the listing price. Definitely a great time to buy!
Dec 19, 2006 07:39 PM
Maureen Francis
Coldwell Banker Weir Manuel - Bloomfield Hills, MI
Coldwell Banker Weir Manuel
First time buyers have always been an important part of my business.   These days there are very few reasons to rent.
Dec 20, 2006 09:42 PM
John Klassen
M & T Bank - Kingston, NY

Unprepared buyers are left out of every market. Decide you want to buy, get educated, get ready...Make it happen.

 

Good points.

Dec 23, 2006 09:31 AM