Where did all the first-time homebuyers go?

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The highly competitive housing market has caused frustration and heartache for first-time buyers since the pandemic began. The latest data from the National Association of Realtors (NAR) shows that first-time homebuyers represent a smaller and smaller share of overall real estate transactions — just 29 percent in August.

Shrinking ranks of first-time homebuyers

August was the first time in years that first-time homebuyers accounted for less than 30 percent of national real estate purchases in any single month. And the situation isn’t likely to change any time soon.

“It’s just the nature of a tight market,” said Gay Cororaton, senior economist and director of housing and commercial research at the National Association of Realtors. “First-time buyers are having trouble competing.”

A variety of factors are confounding first-timers, including limited housing supply, which is pushing up prices. In addition, as empty-nesters look to downsize, young couples and retirees often find themselves competing in the same market segments. What’s more, first-timers are increasingly competing with iBuyers and Wall Street-backed ventures that are snapping up homes for investments.

Cash buyers are flooding the market with more competitive offers as well. Cash sales accounted for 22 percent of transactions last month, compared with 18 percent in August 2020.

“They have to compete with buyers who are able to offer cash,” Cororaton said. “Sellers want assurance that they’ll sell the home quickly.”

Why does it matter if first-timers are locked out?

Homeownership is a key to building family wealth, and delays in becoming a homeowner can make it harder to achieve financial security.

“Those who really can’t buy, yes, they rent, so we’ve also seen rent prices go up,” Cororaton said.

Rents have increased 11 percent on average in the last year, according to NAR, which means renters may be struggling even more to save for a down payment.

“The affordable segment of the market is disappearing and home prices have been rising on average by about 15 percent,” Cororaton said. “That is still outpacing wage gains by about 3 percent.”

What can you do if you want to buy your first home?

There are a few tactics you can follow if you’re determined to purchase a home. One is to modify your housing search to focus on areas that are more affordable and less competitive. That will help you stretch your down payment savings and get into a house sooner.

You can also consider a low down-payment mortgage. Some government-backed mortgages are available to qualified buyers for as little as 3.5 percent down. Keep in mind you’ll need to pay private mortgage insurance (PMI) until you build up at least 20 percent equity, which will make your monthly payments more expensive. If you’re VA qualified, you can purchase a home with no down payment at all, and you won’t have to pay PMI, either.

Another option is to connect with a financial advisor and figure out a short-term, high-yield investment strategy. Keep in mind, there are no guarantees when it comes to investing, so you need to be sure you’re comfortable with the possibility that you may not get the kinds of returns you’re hoping for.

How long will this trend continue?

The housing market shows little sign of cooling down for now, but Cororaton said the current intensity can’t last forever.

The pace of real estate price increases should moderate, she said, and rising mortgage rates could also make the market somewhat less competitive.

Just this week, the Federal Reserve met and signaled that interest rates would go higher starting in 2022. That should help bring down prices and ease the inventory shortage.

Bottom line

It’s brutal out there for first-time homebuyers, with a diminishing share of newbies making it to closing. However, Cororaton said, it’s best not to get too discouraged. It’s still a fine time to buy if the numbers work for you.

“If you can afford to buy a home now for first-time homebuyers, it makes sense,” she said.

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Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
Edited by
Senior mortgage editor