First-Time Homebuyers Not Buying Traditional Starter Homes

first time home buyersThe ranks of first-time homebuyers may have been dropping in recent years. But that trend changed with more newbies entering the market last year, an upswing expected to continue in 2017, according to Realtor.com. Although only 33 percent of homebuyers last year were first-timers, 52 percent are projected to be this year. And 61 percent are under age 35.

It’s a significant shift in housing, Realtor.com reported. Competition is even fiercer for affordable housing. New homebuyers are worried about financial issues such as coming up with a down payment and finding a home within their budget, according to the National Association of Realtors (NAR) publication.

First-time homebuyers are especially sensitive to changes in the real estate market, such as tight inventory, affordability, rising mortgage and interest rates, said Danielle Hale, NAR managing director of housing research.

Because they tend to be younger, they often come to the market saddled with student loan debt, have lower incomes than other homebuyers, and “don’t have equity from a previous property to roll into a home purchase,” she said.

For those reasons, affordable housing is a prime concern for first-time home buyers. Among its housing predictions for 2017, real estate brokerage Redfin expects: “Markets able to offer buyers new construction at affordable prices will take center stage in 2017 since many first-time homebuyers have been priced out the starter home market in more expensive metropolises.”

Shortage of traditional starter homes worsens

The starter-home shortage has worsened for first-time homebuyers in the past year, according to Trulia’s most recent quarterly report in December 2016. The online real estate site says there are particularly large shortages in coastal areas such as Tacoma and Portland, but also in Miami and the California metro areas of Sacramento, Los Angeles, San Francisco, and San Diego.

The last quarter of 2016 saw the steepest year-over-year decline in inventory in three years with the number of homes available for first-time homebuyer falling 12 percent since 2015, according to Trulia. New homebuyers were paying nearly 2 percent more than the previous year to buy a starter home in their local market, spending 39 percent of their monthly income.

First-time buyers spent a median $200,000 on a home, reported real estate research firm, Zillow, in its 2016 survey on consumer housing trends.

It’s a good thing the typical first-time buyer is earning more. The median household income rose for first-time buyers in 2106 to $72,000 compared to $69,400 in 2015, according to NAR’s 2016 Profile of Home Buyers and Sellers.

Toward the end of 2016 more first-timers entered the market, particularly Millennials (ages 28 to 31), Redfin said. Millennials made up more than half—56 percent—of first-time homebuyers, according to Zillow.

First-time homebuyers are particular about amenities

Their tastes in housing were very particular. For instance, they didn’t want a fixer-upper, Redfin reported.

About 40 percent of first-time homebuyers surveyed by Redfin chose design quality, floor plans, and finishing touches as the top features they look for in a home. These surpassed other factors such as green space, 34 percent, length of commute, 32 percent, and property taxes, 15 percent.

Safety, privacy, and more space indoors and out were also key interests for first-timers, according to Realtor.com.

To get the finishes and designs they want, they’ll have to buy in more affordable cities such as Raleigh, Austin, or North Point (Florida), Redfin said.

Once they find their first home with all its extra amenities in an affordable neighborhood, they don’t seem to have plans to move anytime soon, according to NAR. In fact, 75 percent of first-time buyers surveyed by Bank of America early last year said they’d prefer to bypass the starter home. Instead, they wish to buy a home that meets their future needs, even if that means waiting to save more for their home. And 35 percent plan to retire in that home.

First-time homebuyers prefer single-family homes, 39 percent, or townhomes, 34 percent, to multifamily residences, 15 percent, or condos, 10 percent, Realtor.com stated.

Still, they are more likely than repeat buyers to be torn between buying and renting with almost 40 percent considering renting, Zillow reported.

Tips for first-time homebuyers

NAR’s Hale offered these tips for those getting ready to buy:

  • You don’t need a huge down payment: “First-time buyers think a lot of money is needed to get into the game.” They believe that they have to put down 10 to 20 percent, but there are other alternatives such as FHA loans geared toward first-time homebuyers for which they have to put down 3.5 percent. There are also rural USDA housing loans and veteran’s loans with 0 percent down.
  • Set a realistic budget: Talk with mortgage professionals and real estate agents about how much you can afford to pay. Stick to properties in your price range.
  • Get organized and be ready: Affordable properties won’t stay on the market long in such a competitive housing environment. A seller may receive multiple offers, so get preapproved, which is a step past prequalification. This lets the seller know you are a serious buyer.

Find out more about ensuring your homebuyers can get the financing they need in our course Helping Buyers Narrow in on Their Dream Home.  

Article by Roni Robbins. Roni Robbins is a 30-year journalist with business, environmental, and real estate specialties. She wrote real estate articles for Mother Nature Network, the Daily Report, and Atlanta Journal-Constitution. She also reported for the New York Daily News, WebMD, and Adweek with stories picked up by the Huffington Post, Forbes, USA Today, and CNN. Find out more about Roni here.

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