First time homebuyers continue to struggle with low inventory and high prices

The housing market is rough right now all around, but it’s particularly difficult for first-time homebuyers. Pushed out by ongoing high prices, rising mortgage rates and low inventory, this crucial group remains, for the most part, on the sidelines. The National Association of Realtors’ most recent Profile of Home Buyers and Sellers, based on a survey of homebuyers nationwide, confirmed this, revealing a significant decrease in the number of first-time buyers and an increase in their age. Read on for more insights.

First-time buyers struggle with housing market

Today’s challenging real estate climate has kept many first-time homebuyers away. In fact, their share of the market was only 26 percent — the lowest since 1981, when NAR first started collecting this data.

For comparison’s sake, first-time buyers had a 34 percent share in 2021. Not only did 2022 see fewer first-time buyers, but the ones it did see were older than ever, with their typical age being an all-time high of 36.

Jessica Lautz, NAR’s Deputy Chief Economist and VP of Research, wasn’t surprised by the drop in first-time buyers, given the market’s rising rates and persistently low inventory.

First-time buyers are older as a result of saving for down payments for longer periods of time.

— Jessica LautzDeputy Chief Economist and VP of Research, National Association of Realtors

“First-time buyers are older as a result of saving for down payments for longer periods of time or relying on a generational transfer of wealth to propel them into homeownership,” she said in a statement. “Those who have housing equity hold the cards.”

More than a quarter of first-time buyers reported that saving for a down payment was the most difficult part of their home-buying journey; most sacrificed on luxury goods, entertainment and clothing purchases to build up more savings. The typical down payment for a first timer was 6 percent, compared with 17 percent for repeat buyers, and 22 percent used a gift or loan to help pay it.

Types of homes purchased

Traditional single-family homes were the most popular option for 2022 buyers, with 79 percent of sales being detached single-family structures. Of all buyers surveyed, 88 percent purchased an existing, previously owned home, while 12 percent purchased new construction. The typical home purchased was about 1,800 square feet, with three bedrooms and two bathrooms.

Location-wise, neighborhood was the top factor considered, with 49 percent of buyers citing the quality of the neighborhood above all else. Affordability and proximity to friends and family were also important, both coming in at 37 percent.

Buyers bought more homes in small towns and rural areas, moving a median distance of 50 miles from their previous homes. That’s a huge increase from a median of just 15 miles between 2018 and 2021. The share of buyers purchasing homes in small towns was 29 percent, and in rural areas 19 percent, both record highs. Meanwhile, the share purchasing in the suburbs (39 percent) and urban areas (10 percent) both declined.

“For many, remote work decisions were formalized in the last year, providing clarity for employees to permanently move to more distant areas,” Lautz said. “For others, housing affordability was a driving factor to seek homes in areas farther away.”

Finding and financing homes

Finding a home took longer in 2022, with buyers spending a median of 10 weeks on their search — two weeks longer than in 2020 and 2021. And they typically purchased the home at full asking price, with 28 percent paying above ask.

Looking online was by far the most popular method of searching for a home, with a full 96 percent of buyers saying they used online tools at some point in the process. Ultimately, 88 percent bought using a real estate agent or broker, while 10 percent bought directly from the previous owner.

When it came to money, fewer recent buyers financed their purchase in 2022, at 78 percent, than 2021, which saw 87 percent buyer financing. The source of down payment funds was savings for 47 percent of buyers, while 38 percent of repeat buyers used proceeds from the sale of their previous residence. Despite all the challenges, 88 percent of buyers overall said they saw purchasing a home as a good financial investment.

How to qualify for a loan as a first-time buyer

Many factors affect a buyer’s ability to qualify for a home loan. Here are some of the most important financial factors to consider when you’re applying for a mortgage: 

• Credit score: As a general rule, the higher your credit score, the better mortgage rate you will be eligible for. But different loan types have different credit requirements. Conventional loans typically require a minimum credit score of 620. FHA loans, which are backed by the Federal Housing Administration and are popular with first-time buyers, have lower requirements: 500 with a 10 percent down payment, or 580 with a 3.5 percent down payment.
• Down payment amount: Saving enough for a down payment is a crucial step for any homebuyer, as this is a significant chunk of money. It’s often considered standard to put down 20 percent of the home’s purchase price, which allows you to avoid having to pay private mortgage insurance. But many loans allow you to put down much less, and some require no down payment at all. First-time buyers should be sure to look into down payment assistance programs in their area, which can help you overcome this financial roadblock.
• Debt-to-income ratio: Lenders will also look at your DTI when they assess you for a mortgage. This value reflects how much income you bring in versus how much debt you owe each month, including things like credit card bills and student loans. As with credit scores, the lower your DTI is, the better.

FAQs

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  When will housing inventory increase?

  The country’s inventory of homes for sale actually has increased over the past year, but it is still extremely low. There was a 2.6-month supply in February 2023, according to data from the National Association of Realtors, which represents a not-insignificant 15.3 percent rise over the same time last year. However, it is still well short of the 5 to 6 month supply needed for a balanced market.
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  Why is housing inventory so low?

  Several factors account for the country’s ongoing housing shortage. For one thing, high mortgage rates are causing many homeowners, who are locked in at much lower rates, to hang on to their homes when they might otherwise sell. If rates were to drop, as some experts predict, that may result in a higher influx of homes on the market. Exacerbating the problem, labor shortages, increased materials costs and supply chain snags have held back the pace of new construction.
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  When will housing prices drop?

  Home prices are, in fact, already on a downward trend. As of the most recent Case-Shiller Home Price Index, released in March, housing prices have fallen for seven months in a row. Many experts expect prices to continue dropping throughout 2023, but it will be a slow decline, not a significant fall-off. If mortgage rates drop, that could also trigger a drop in prices, as greater affordability gives buyers more power. When sellers are in the driver’s seat, as has been the case for quite some time now, they have more power to dictate prices.