Saving for a down payment can be an uphill battle for first-time buyers.
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It’s about to get harder for Millennials to buy their first homes. Nearly 45 million Americans will reach the typical age for first-time home buyers within the next 10 years, creating stumbling blocks in an already challenging market for those racing for a spot in the starter home market.
The median first-time home buyer in the U.S. is 34 years old, according to online real estate marketplace Zillow. There are 44.9 million Americans ages 24 to 33, or potential future first-time home buyers, compared with 41.8 million people ages 35 to 44, or potential past first-time home buyers, a 7.4% increase.
For the past several years, a tight supply of starter homes has been a barrier for young potential home buyers. Starter homes have gained 57.3% in value over the past five years, a median increase of $47,600, while for-sale inventory in this price range has dropped 23.2%, according to Zillow. Over the same time period, the most expensive third of starter homes gained 26% in value, and homes in the middle third appreciated 36.8%.
Though the current housing market is cooling off, this coming wave of buyers faces a future starter-home market with now-familiar dynamics: relatively high demand and low supply, in which the stiff competition among buyers worsens the affordability issues caused by rising prices.
“The decision to buy a house is frequently linked to people wanting room for children, maybe wanting to get a yard for their kids,” says Zillow economist Jeff Tucker.
Other reasons Millennials might want to own a home include security, independence, building equity, stability and financial flexibility, according to a recent survey by Mr. Cooper, the nation’s largest non-bank mortgage servicer and a leading mortgage lender.
But saving for a down payment can be an uphill battle for first-time buyers. In fact, a recent Zillow analysis found that buyers need 1.5 years longer to save for a down payment than they did 30 years ago and to secure a loan. Nearly four times as many first-time buyers who obtained a mortgage last year were denied at least once (29%) compared to repeat buyers (8%).
The Mr. Cooper report found that 58 percent of aspiring homeowners lack the funds for a down payment; nearly half (43 percent) don’t have a financial plan in place to purchase a home someday; 75 percent would be willing to work a side job if it meant owning a home sooner; and 36 percent would have a roommate if it meant being able to afford a home sooner.
Some markets provide better conditions than others for first-time buyers with a combination of lower home values, strong appreciation forecasts, available supply and a high share of listings with a price cut.
The three best markets for first-time home buyers in the 2019 home shopping season are Tampa, Las Vegas and Phoenix.
“These are relatively affordable markets with median home values well under $300,000,” says Tucker. “We’ve also seen a large fraction of listings with price cuts. That’s good news for first-time home buyers. It means that buyers have a little more bargaining power.”
San Diego is predicted to see a huge increase in potential first-time buyers.
Brenda Richardson
San Diego and Boston are expected to see the largest jumps in potential first-time buyers. Both metros will see a nearly 20% increase in the next wave of potential first-time home buyers compared with the previous wave, according to Zillow.
“Boston and San Diego will have the biggest fraction of people hitting that median first-time buyer age, 34, than anywhere else in the country,” says Tucker, adding: “One caveat there, though, is people are always free to move. So if people find that as they age into their mid-30s and look around to buy a home, they could find that it might be too expensive to find the home they would like to live in Boston or San Diego. And so at the metro level, it’s a little harder to predict the future without a crystal ball. Just because somebody is a 30-year-old in Boston today, you know they will be 34 in four years, but we don’t know where they are going to live in four years.”
Buyers making the transition from renting to homeownership help ease rental demand, which holds down rent-price growth. But Tucker acknowledges the other side of the coin, saying “if this coming wave of buyers has to compete fiercely for homes to purchase, that could drive up rent prices as well as home values.”