First-Time Homebuyers May Face ‘Goliath’ Odds in the Spring Housing Market

If this spring is a window of opportunity for the first-time homebuyer to achieve the American Dream of homeownership, then it’ll mean all-cash buyers stay away from the housing market. Otherwise, it’ll be a match of David vs. Goliath for first-time homebuyers.


The housing market currently has some positive news. After the Silicon Valley Bank and Signature Bank collapse and contagion fears from First Republic Bank last week, mortgage rates dipped from a high of 7% earlier this month to below 6.625% or more.


Meanwhile, as inventory remains limited, housing starts increased in February to 1.45 million, up 9.8% from January, and home completions jumped over 12% in February from the previous month, which “bodes well for home buyers this spring,” according to Orphe Divoungu, the senior economist at Zillow Research.


Mortgage applications for new home purchases increased in February, according to last week’s Mortgage Bankers Association’s (MBA) Builder Application Survey. Weekly mortgage applications jumped for the second straight week, MBA reported last week, after hitting a 28-year low at the beginning of March.


However, while recent numbers provide cautious optimism for first-time homebuyers financing a home this spring, let’s not forget last year’s all-cash buyers—many representing large institutional investors, some smaller investors, and even repeat and second homebuyers.


Redfin reported that all-cash buyers accounted for nearly 32% of all home purchases in October 2022, the highest number since 2014 and up from almost 30% the year before.


Suppose competition heats up again for homebuying as it did during the pandemic. In that case, all-cash buyers typically have the edge for several obvious reasons, not to mention the recent bank failures that could further tighten mortgage credit availability, as shown in MBA’s February Mortgage Credit Availability Index.


Some housing analysts, however, remain optimistic and believe mortgage rates will further drop once the Fed has finished its fight with inflation and home prices continue to drop.


Despite falling rates and a decline in home value, home prices remain up 28% since the coronavirus pandemic began in March 2020, This month, Redfin reported monthly mortgage payments for the typical homebuyer, based on higher rates and prices, hit a record high of $2,563, up 29% from $1,988 a year ago.


Meanwhile, all-cash buyers and institutional investors continue to widen the wealth gap as they have for the past decade following the 2008 bank bailouts and Great Recession. Lawrence Yun, the chief economist at the National Association of Realtors, said in The Washington Post last month, “Only the wealthy are essentially buying homes.”


A May 2022 report from the NAR Research Group confirms that institutional investors had a larger market presence and offered cash and services that home sellers preferred despite an offer price at about the same as non-institutional buyers. The report also showed institutional investors offered the same or faster service for sellers than “mom-and-pop landlords.”


In the past decade, institutional investors may have priced first-time homebuyers out of the market. According to last year’s NAR report, home values shot up more than 40% in the past ten years in areas with shares of 30% or more investors. In those same areas, rents rose by more than 30%, and home sales jumped nearly 70%.


Last year, first-time home buyers accounted for 26% of all homebuyers, down from 34% in 2021. At 26%, it was the lowest share of first-time buyers since data collection began for NAR’s research. In 2022, the typical first-time buyer was 36 years old, up from 33 in 2021, and the typical repeat buyer was 59 years of age last year—both at record highs. Also, the past decade had first-time homebuyers accounting for one-third of all buyers, down from the typical 40% or more average prior to the 2008 housing crisis.


Saving for a downpayment has also been an issue for first-time homebuyers. NAR research reported that 26% of first-time homebuyers said saving for a downpayment was the “most difficult step in the process.” However, forecasts 5.25% on high-yield savings accounts this year. Currently, top high-yield rates range from 4% to 5% in Annual Percentage Yield (APY).


The Biden Administration has been taking steps to try and improve the economic conditions for first-time homebuyers, indirectly providing student loan forgiveness that can include potential first-time homebuyers and directly by lowering rates on FHA loans. The Administration’s Housing Supply Action Plan is a five-year action plan to narrow the housing wealth gap—but that takes time beyond the current spring housing market.


The Administration’s effort to provide $25,000 through The Downpayment Toward Equity Act 2021 is still stalled in Congress as of March 17, 2023. The plan would provide eligible first-time homebuyers up to $25,000 cash for a down payment on a home, on closing costs for a mortgage, interest rate reductions using discount points, or other home purchase expenses. However, higher housing prices will have trouble factoring into that downpayment. The $25,000 would likely cover a $250,000 home at 5% down and closing costs or 10% down, and that’s it. Any home at a higher cost would require further assistance. Still, some current downpayment assistance programs would forgive downpayments if consecutive mortgage payments are made for a year.


Despite these efforts, they may not come to fruition for at least another year. If patience is a virtue, then first-time homebuyers will need to be virtuous before defeating all-cash buyer goliaths in this spring’s housing market.


Michael Murray

Michael Murray is Director of Communications at Strategic Vantage, a PR and marketing firm based in Miami, Fla., serving the mortgage banking industry. As a Board Member for NAMI Montgomery County, Md., Michael helped create a scholarship for HBCU students focusing on mental health studies. In addition to blogging, Michael edits and writes plays–some performed on radio, television, and theater. He graduated with an English degree from the College of William and Mary.

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