No Country For First-Time Home Buyers

There was a time when the US housing market was not "driven" by hedge funds armed with government-subsidized, "REO-to-Rent" loans loading up on distressed properties, by banks refusing to release foreclosed properties into the market (thus creating a market subsidy) or by foreigners eager to park their "tax-evaded" wealth with the Anti Money-Laundering exempt National Association of Realtors. Instead, the main driver of US housing were first-time home buyers, "typically couples in their late 20s or early 30s" who historically have accounted for about 40% of home sales. Alas, last year, and all throughout the New Normal, this number has been about 25% lower, or representing just 30% of all sales (except for a brief spike to 50% in 2009 courtesy of recession-era tax credits). Then again, what 30 year old needs a home when one can now get an E-trade terminal under the bridge to generate "the wealth effect"?

The WSJ's take: "The depressed level of first-time buyers could prove to be a drag on the housing rebound and the broader economic recovery over the longer haul. First-time home buyers are the foundation of the real-estate market and are major contributors to their local economies, often buying up older homes, revitalizing communities and spending money on furniture and renovations."

More with the obligatory personal anecdote:

"First-time buyers are important to get the housing market to move to a new plateau," said Steven Ricchiuto, chief economist with Mizuho Securities USA Inc. "Without them, you just get stuck at a marginal recovery environment."


Malik Benyebka is among those having a hard time getting in. Mr. Benyebka, a 40-year-old tennis coach, now rents a three-bedroom home in San Marcos, Calif., which he shares with his wife and two daughters. They are looking to purchase a similar home in the same area, for around $450,000, but have thus far lost out on all their bids—in one case to a buyer who offered all cash.


In the meantime, Mr. Benyebka and his family are sending letters to owners in hopes of tugging at their heart strings. "It's pretty much, 'We have two daughters. We are a family, we work hard, we're first-time home buyers trying to get a house in this neighborhood,' " Mr. Benyebka said of his letter.

On other words, normal buyers getting crowded out by those close to the Fed's zero cost capital? Whowouldathunkit? Not those who are "engineering" the housing recovery apparently.

In June, first-time buyers accounted for 29% of purchases of existing homes, compared with 32% in June a year ago, according to the NAR's June existing home-sales report released Monday.


The report found that overall, sales of existing homes fell 1.2% in June to a seasonally adjusted annual rate of 5.08 million. While that was down from a revised 5.14 million in May, it was up 15.2% from June 2012 and was the second-highest level of sales since November 2009.


The national median existing-home price was $214,200 in June, up 13.5% from a year ago.

What is the solution? Why more NINJA loans of course, and everything else that cemented the last days of the previous housing bubble.

The sharp price gains that have been a hallmark of the housing recovery in many markets could moderate as mortgage rates rise, a point that would likely reduce competition among buyers. But for now, the housing market's brisk rebound over the past few years has exacerbated a familiar problem for many first-time buyers: financing.


People in the first-time home-buyer demographic are more likely to be unemployed, underemployed or have a spouse unemployed, to have lingering student debt, a less-established credit record and weaker credit scores.


Between January and June, the median credit score for first-time buyers was 720, below the 750 for repeat buyers, according to information collected for the National Association of Realtors' Confidence Index.


At the same time, no-money-down mortgages and other products that were popular before the mortgage crisis have largely disappeared.

And if that wasn't enough to put a dent in the "recovery" narrative there is the other issues Zero Hedge first discussed a month ago: the impact of spiking interest and mortgage rates on house affordability.

In other words the primary driver of the "recovery" - ultra cheap credit is gone. The result: a complete collapse in mortgage applications as we also showed recently.

So what is a housing market which, like everything else, is now split into two - one for the haves and one for the have nots to do? Cater to the former of course.

In some communities, first-time home buyers are nearly absent. Anne Williams, a Realtor in Knoxville, Tenn., said she hasn't closed a single home for a first-time home buyer so far this year. Usually she has closed about five or so by this time.


With fewer first-time home buyers in the market, home builders have increasingly targeted the move-up segment, a group that can typically afford to spend more on a home.


Home-building giant D.R. Horton Inc., which is building more higher-end homes, saw its share of first-time buyers slip in its fiscal second quarter to 47% of closings from 49% a year earlier.


The Fort Worth, Texas, company is building homes that start at $1 million at its Veneto at Positano community near San Jose, Calif., a far cry from the affordable entry-level homes that helped it become the nation's largest home builder.


"About two years ago, we began to experience increased demand for larger homes…and we realized the move-up buyer was back in the market," said President and Chief Executive Donald Tomnitz.


The company's average delivery price in its second quarter was about $242,500, up about 10% from the prior year.

Others are not quite so lucky:

Enrique Jauregui, a financial analyst with a private-equity group, has been searching for his first home in Miami for about six months.


His price limit of $200,000 and his need for financing makes it impossible to compete with buyers—many of them from outside the U.S.—who are paying cash, he said.


"The way I've seen it, is that cash is king today. Sellers are hesitant to use anyone who is using financing," said the 24-year-old, who is renting a one-bedroom condo in Key Biscayne. "It is disappointing. I don't have an ability to move forward."

Bottom line: be rich and live like a king in the McNewNormalMansion (all cash purchase of course). For everyone else, keep buying the stocks that Primary Dealers are selling - maybe this time it is different, and prosperity for everyone will follow. Maybe not.