First-Time Home Buyers Face Continued Headwinds
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First-Time Home Buyers Face Continued Headwinds

First-Time Home Buyers Face Continued Headwinds

Mobility Trends and Hot Topics

Published: Sep 30, 2022

Low home inventories, high housing prices and interest rates have slowed younger, first-time buyers from both becoming homeowners and the potential wealth-building aspect of owning a home. Consider that:

  • About 65 percent of American households own their own home.
  • Between 2010 and 2020, the total value of owner-occupied homes in the U.S. rose from $8.2 trillion to a staggering $24.1 trillion, according to the National Association of Realtors.
  • Unlike rent, a homeowner with a fixed-rate mortgage provides more stability in knowing the principal and interest payment will not change, regardless of inflation.
  • First-time homeowners may qualify for tax credits. 

Historically, first-time home buyers made up about 40 percent of sales; but that percentage has dropped this year.

An Up Hill Climb and a Moving Target

Increasing mortgage interest rates and escalating home prices have become a high hurdle for home buyers, especially for first-time buyers. Now, they are forced to stretch farther. Consider that:

  • The average rate on the 30-year fixed mortgage -- the most popular product today –started this year around 3 percent and is now approaching 7 percent.
  • According to Realtor.com, in 2021, Millennials in the 23 to 31 age range paid a median price of $250,000 – today it is $280,000;  and those 32 to 41 paid a $315,000 median purchase price in 2021 vs. today’s median of $350,000.
  • Per Redfin, the typical homebuyer’s monthly mortgage payment has climbed $337 (15 percent) over the past six weeks to a new high of $2,547.

As qualifying for loans have become more stringent to secure, there’s been a significant uptick in adjustable-rate mortgages (ARMs) which have lower monthly payments. At the start of 2022, ARMs made up just 3.1 percent of loan applications. More than 12 percent of borrowers applied for ARMs in June and July – the highest percentage of ARM applications since 2007 -- according to Zillow.  9.1 percent of September’s loan applications were also ARMs, according to the Mortgage Bankers Association.

Taking out an ARM may be seen as a “gamble” on what rates will do in the future. Though rates could decrease during the adjustable-rate period of the loan, monthly payments would be higher should they increase.

Cash is King

Economists expect home prices will start slowing, and even dropping, in some of the most overheated markets in the country over the next couple of years.

Though sellers may lower asking prices, their homes may be listed on the market longer. This could benefit buyers who can afford to wait, but bidding wars put first-time homebuyers at a disadvantage since they usually have limited savings compared to investor buyers who are offering cash or other buyers who benefited from strong markets.

In fact, according to Redfin, homebuyers who offered all cash were more than four times as likely to secure a deal as those who did not, making it the most effective approach. 

Though bidding wars may have slowed in competitive U.S. markets, they leave first-timers at a disadvantage. To secure a property, some buyers opt out of typical inspections or protection clauses. “A buyer’s odds of winning a bidding war,” according to Redfin, “increase significantly by waiving the financing contingency or conducting a pre-inspection”.

Buyers who used those strategies “were 31 and 25 percent more likely to win than those who didn’t, respectively.” 

However, waiving inspections can have consequences. If an employee moves on their own or relocates with their employer again later, they may be required to complete those repairs out of pocket. NEI provides counsel to help avoid future property eligibility concerns such as excessive acreage, environmental issues or building / material defects to help mitigate future risk.

Helping Relocating First-Time Buyers

Given how volatile markets have been lately and because nobody’s housing market predictions are sure things, NEI counsels relocating employees about the emotional ups and downs when buying / selling a home and the necessary negotiations today. We help clients prepare for possible exceptions due to market circumstances out of relocating employees’ control and to brainstorm unique solutions that fit each company’s culture, budget and drivers.

Companies can also help relocating employees who are renters who want to fulfill their dream of homeownership. NEI increasingly sees more companies offering relocating renters destination home closing costs reimbursement and direct-billed mortgage partner assistance.

Another method companies can use is contributing to home purchases for first-time homebuyers by offering funds towards new home down payments or closing cost assistance or other incentives in the form of forgivable loans that don’t have to be paid back unless the employee leaves the company within a certain period, perhaps two or three years.

More of the Same

New residential construction slipped again in June as challenging financial conditions discouraged potential buyers. With home construction constrained by labor and supply chain issues, the housing problem isn’t going away soon.

“While we do expect home price growth rates to decline, we don’t expect prices to fall much at the national level. For home buyers trying to determine the best timing this year, the main benefit of waiting is that there may be less competition as supply starts to build up,” says Chen Zhao, Redfin’s economics research lead.

If you would like to discuss this topic further, please reach out to your NEI representative at any time.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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