Is the time right for first-time homebuyers?
By Claes Bell • Bankrate.com

During the run-up in real estate prices over the last decade, many millennials 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 millennials 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 millennials 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 be taking," Sanders says.