The U.S. housing market has seen slow but steady improvement in recent years, but with prime conditions in place for buyers, you would think we'd be doing better by now.
The economy is picking up speed, interest rates remain near historic lows, and unemployment is at its lowest in years. So where is the boom?
A big reason for the muted housing recovery is the conspicuous absence of a key demographic group: the first-time homebuyer. Over the past three decades, first-timers have accounted for about 40% of annual sales, but in the current market, their share of housing purchases has been closer to 30%, according to the National Association of Realtors. The number of first-time buyers -- typically a couple in their late 20s or early 30s -- is at its lowest level since 1987, a trend that's had a major impact on the housing sector's overall health.
Many factors can be linked to the decline in homebuying, but the biggest obstacle for these millennials appears to be too much debt, mainly in the form of student loans.
According to the TransUnion Consumer Wallet Study, student loans account for 37% of overall loan balances for those 20 to 29 years old, nearly three times their level in 2005. How do these young consumers afford such a drastic increase in educational debt? They stop buying houses. The TransUnion study shows that mortgages have fallen from 63% of overall credit balances in 2005 to 43% this year.
When you add in tighter lending standards and fierce competition by investors in the entry-level price ranges, the difficulty of buying a first home can seem overwhelming.
If you're an aspiring first-time buyer, don't give up on that dream. Remember you are entering a marathon, not a sprint, so even if you're not financially ready right now, you can help yourself by creating a plan that gradually leads to homeownership.
- Do you think you have too much student debt? Our recent Insight on student debt provides helpful tips on how to steadily chip away at that rock.
- Can't seem to save for a down payment? There's good news from the Federal National Mortgage Association, commonly known as Fannie Mae: The federally sponsored mortgage company soon will offer a loan program with as little as 3% down. The Federal Housing Administration already has a 3.5% down payment program, and the Veterans Administration has a zero down payment program for qualified veterans.
- Feel like you missed out on rock-bottom interest rates? Yes, rates have risen a bit from their recent lows, but they are still far below their historic norms. My first mortgage loan was at 7%, and I had bragging rights at backyard barbecues. Interest rates change daily, and until you are financially ready to buy, you shouldn't discourage yourself by following them too closely.
At times, the odds may seem stacked against you, but I assure you they're not. The key is to set your goals and start plugging away. Whether your plan has you on track to make a purchase in the near term or further out in the future, implementing that plan today can bring you closer to reaching your goal of homeownership.