Is the time right for first-time homebuyers?

By
Mortgage and Lending with Cherry Creek Mortgage

During the run-up in real estate prices over the last decade, many millenials were either in college or in entry-level jobs, watching helplessly as they were priced out of the market while aging boomers gleefully cashed in their newfound equity and used excess money for real estate speculation, driving prices even higher.

But now, as the real estate bubble deflates, is this a good time for frustrated millenials to finally buy a home? The answer, unfortunately, may be no.

"But why not?" prospective homebuyers may ask, probably with gritted teeth. Well, you may have heard the words "credit crunch" circulating around the water cooler lately, and for good reason. In the aftermath of the subprime mortgage mess, mortgage brokers and banks have sworn to tighten lending standards. Gone are the days when a 5 percent -- or less -- down payment was commonplace and banks glossed over problems in employment history, credit history or proof of income. Now, new homebuyers are likely to need at least 10 percent down and can expect lenders to scrutinize every aspect of their financial pictures.

"First-time homebuyers would be better off renting and accumulating a larger down payment rather than jumping into a soft housing market," says Dr. Anthony B. Sanders, professor of finance and real estate at Arizona State University.

What this means for first-time homebuyers is a steeper price of admission in the form of a higher down payment, and likely some difficulty getting financing at all for those with sketchy credit or high debt-to-income ratios, which includes the many millenials who come out of college with stratospheric credit card bills and tattered credit histories.

You can buy, but should you?
But even if you can afford to buy a home under these conditions -- and with many distressed homeowners and builders desperate to sell, chances are you can -- the real question is, should you?

Again, the answers here will probably be frustrating for homebuying hopefuls. While falling prices may seem like a blessing for young homebuyers, they also create an element of risk. According to the National Association of Realtors, or NAR, the median existing-home price fell 3.3 percent nationally in 2007, and as much as 10 percent to 12 percent in troubled markets like Florida and California. A probable wave of foreclosures resulting from rate resets on adjustable-rate mortgages signed in 2005 and 2006 threatens to drop prices even further in 2008.

Don't get upside down in first home
With no one quite sure when real estate prices will stop sliding, young homebuyers who can put down only between 5 percent and 10 percent of the price of their homes may see what little equity they have eroded by their homes' falling values. This can leave them "upside down," or owing more on their mortgages than their homes are worth.

"Certainly, there is a chance that the housing market has hit the bottom, but this is not a bet that first-time buyers should taking," Sanders says.

This is an especially bad situation for people in their 20s and 30s. Because they are just starting out in their careers, young adults relocate often in search of better jobs. Their growing families mean that they will, in all likelihood, be moving out of their first homes quickly. In a situation where a homeowner has negative equity, getting out of a home is extremely difficult.

The owner must be able to pay the mortgage off at the time of sale. If the house can't be sold for at least what is owed, homeowners are stuck.

"First-time homebuyers tend to move on fairly quickly," says Holden Lewis, Bankrate.com's mortgage expert. "Buying at a time like this, they run the risk of being immobile."

Are you a first-time homebuyer eager to get into the market? Here are steps to take to help you decide whether you're ready to take the plunge.

Friendly neighborhoods for buyers
Still, in some markets, where prices didn't skyrocket as much as in former boom areas like Florida and California, the outlook for prospective first-time homebuyers is much better. Some markets in Texas, Utah, North Carolina and other states have actually seen modest growth and may offer less risk for first-time buyers.

Dawn and Michael Kessay purchased their first home in Seattle recently and enjoyed the best of both worlds -- a good selection and relatively risk-free pricing. Their agent, Sheryl McLaren, believes that despite the grim national news, this is still a good market for first-time buyers with strong credit.

"Yes, the market's tightened up, and the buyers that are out there are very qualified," says McLaren, who is an agent with Seattle's Zip Realty. "You have to be a strong buyer, but you'll have more negotiating power."

"We'd been thinking about buying for years, and hadn't because we'd been hearing all these bad things about the market," says Dawn Kessay. "(Michael) thought we should go look. We did and it was the perfect time -- it's definitely a buyer's market."

The couple searched for only two weeks before finding a house that gave them room to grow and fit their price range. "I think we got a bargain," says Dawn Kessay. "They had already lowered the price, and we got it lowered even further, and they paid closing costs and for a couple of repairs."

The Kessays have no plans to move in the near future, so they should be able to ride out any downward turn in prices in the Seattle market. For young buyers like the Kessays, with good credit, a down payment and the intention to stay put, the time might just be right.

Still, for most millennial homebuyers, the risks outweigh the benefits, especially with a glut of affordable rental units coming available as desperate sellers try to rent out units that are just not selling in the current markets. It may be best to spend most of 2008 kicking back, calling your landlord when your appliances break down and watching the real estate market for signs of a recovery.

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Rainer
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Joel Silberstein Brooklyn NY Certified Mortgage Specialis
The Silberstein Group - Brooklyn NY Mortgage Planning Team - Brooklyn, NY

What a great Post rick

You lay the ground for a lot of discussion. First let me start with the assumption that the professors advise first Time home buyers should save up more money and wait, goes only for those overstraining to make the payment for the sake of owning a house. But anybody who has a decent salary let them buy ASAP new or old. Why would they let the IRS be a senior partner in their money. As far as we are concerned if you buy a house you use money that would have been paid to the IRS ,and you get to use it for yourself.

Here are the benefits of owning your own home

Interest deduction as opposed to rent which is not tax deductable

Property depreciation over 27 ½ years.

Property tax deductable at the federal level. Providing you're not subjected to AMT!

Now I do not disagree that since first time owners tend to move around quick they might stay with a negative equity. However, saving up for a larger down payment in a declining market is defiantly not the solution. Why would anybody burry liquid money in an investment that initially loses, in this case the declining home prices.

But there is a plan for every man, a typical example would be having a interest only loan and paying the interest to the bank and the principle to themselves, thereby preserving the tax deduction,  and saving the principle in an interest bearing account, so that after 2years they want to move they might have 6 months or even a year's worth of mortgage payment saved in a side fund. Should they not be able to sell, putting the property up for rent is always an option. So there you have it, they are mobile again!

I appreciate your comment and your posts.

Sincerely Joel Silberstein

Mar 03, 2008 02:13 AM #1
Rainmaker
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Richard Sweum
1st Security Bank - Everett, WA
Time...how much time do they have.  Under 3 years, no down payment--wait a little while.  It costs about 10% to sell a home, figure 3% appreciation at a maximum (if at all), they will be upside down if they need to sell in under 3 years.  I agree that it is wise for first time homebuyers with no-down payment to go slowly in a soft market.  What's the rush? 
Mar 03, 2008 03:01 AM #2
Anonymous
Bill Kennedy, Kennedy Communications

The professor's advice is no more than a discussion about market timing.  Market timers in any investment are guessing the best time to enter a market.  The answer is when you are ready for the commitment of the investment.  Return on renting is worse than zero, it is an expense.  Home buying is not an opportunity play.  It should not be purchased to flip.  Historically homes were not purchased to sell in three years.  That flip mentality came about only in the last decade and caused this whole mess to begin with.  One reason people sell early in the ownership cycle is that they didn't get what they wanted.  With the huge selection of homes on the market that should be less of a concern.  So if you find a home you love, buy it.  If you wait too long the desirable properties are not available.  So sitting on the sidelines is not a winning strategy if you want a home.  Besides, in many markets home prices are approaching replacement costs. Given that shelter is a basic need in life, there will always be demand to hold prices to some sustaining level.  I do not know that level and no one else does.  But that unkown is the classic risk/reward scenario.  There have been housing downturns before and there will be others.  Meanwhile over the years the long-term benefits of home ownership continue to be real. 

Sep 02, 2008 03:11 AM #3
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