First-time home buyers not always enjoying full benefits of housing recovery

by Broderick Perkins

(12/7/2012) Tight, more expensive mortgage money and economic malaise are preventing first-time home buyers from cashing in on a home buy at a time when mortgage rates are at record lows and rock-bottom home prices are on the way up.

The latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey of real estate agents reports the first-time homebuyer share of home purchases fell to 34.7 percent in October, down from 37.1 percent in June and the lowest first-time homebuyer share ever recorded by the survey.

"Financing of first-time homebuyers with low down payments threatens to become a significant problem in the U.S. housing market," said Thomas Popik, research director of the Campbell/Inside Mortgage survey.

"Fifty percent of first-time homebuyers use Federal Housing Administration (FHA financing, but FHA insurance premiums are increasing and underwriting is becoming more strict, said Popik.

Consumer advocates say regulatory overhaul is necessary but critics complain all the new rules also throw a wrench into the machinery.

"Private mortgage insurance has started to fill the gap, but the long-term status of private mortgage insurance is in question pending the publication of the Qualified Residential Mortgage regulation resulting from Dodd-Frank (Wall Street Reform and Consumer Protection Act)," Popik added.

Path blocked to traditional listings

The survey also reports first-time home buyers, more than other groups, have been less able to cash in on non-distressed traditional sales.

The non-distressed property share of all home purchases rose to 64.7 percent in October, up from 55.7 percent back in February and the highest non-distressed property share recorded by HousingPulse in its three-year history.

First-time home buyers have seen their share of non-distressed property home purchases fall from 38.7 percent in June to 33.6 percent in October, according to HousingPulse.

Traditional listings typically don't come with extra fix-up costs associated with distressed properties. They also are more appreciation-ready than distressed properties. First-timers have a tough time getting into the market, typically want to avoid fix up costs right away, but need quick appreciation to help them settle into a new homeowner's budget.

The group of first-timers was the only group of buyers that have not seen their share of non-distressed property home purchases increase in the last half of 2012, the survey found.

Among current homeowners, their share of non-distressed properties rose from 50 percent in June to 54.2 percent in October. Even investors' share rose from 11.3 percent to 12.2 percent over the past five months.

Rising prices on non-distressed properties are partially to blame for locking out some first-timers. FHA loans, however, may be the greatest factor. Because FHA loans come with low 3.5 percent minimum down payment requirements and slightly looser underwriting requirements, they are a primary financing vehicle for first-time home buyers.

Unfortunately, real estate agents responding a special survey question said this year's hikes in FHA mortgage insurance premiums have taken a toll on first-time homebuyers shopping for a home.

The FHA recently announced it plans to raise mortgage insurance premiums again, by an additional 10 basis points in early 2013 as part of an effort to improve the financial condition of the cash-strapped FHA mortgage insurance fund.

Agents also said home sellers are refusing to accept offers from purchasers using FHA financing.