Buying a home is rarely a smooth, stress-free experience. However first-time homebuyers struggle in ways that those who are on their second, third, or more, purchase, do not. What is it that makes first-time homebuyers struggle more than their more experienced counterparts, and do first-timers struggle more in today’s real estate market that they have done in the past?
Figures from the National Association of Realtors (NAR) would suggest that yes, as we approach the third decade of the 21st century, being a first-time home buyer is harder than ever, and it is having a knock-on effect on the rest of the housing market.
First Time Homebuyers Drive The Market
Historically, first-time buyers create a demand for new construction and are the ones who enable existing homeowners to sell up and trade up to larger, more expensive homes. Having no house to sell before you can move forward has always made first-timers popular with sellers who have placed an offer on their new property, contingent on selling their existing home.
Struggling first-time homebuyers not only affect existing homeowners from selling but also cause new builds to sit empty and developers to put additional, pending projects on hold. Consequently, there is less housing stock available and the entire market slows. This exact scenario is what’s happening right now.
According to the NAR, only 29% of recent home sales involved first-time buyers and this has been a significant contributory factor in the shrinking of the housing market in general.
How Do First-Time Homebuyers Struggle?
The ways in which first-time homebuyers struggle can be found at both the macro social, cultural, and financial world in which we live, as well as, the micro, personal level. Some of these struggles you can ease, some of them can be alleviated entirely, and some we must learn to accept, and work within their confines.
I asked Realtor Bill Gassett, a 31 year veteran of the Real Estate industry, and one of the countries top RE/MAX agents, what he thought first-time homebuyers struggled with the most. As the founder of one of the web’s most visited real estate websites and a veteran of not one, but two market crashes he has a unique perspective on both past and current struggles.
Bill told me that many first-time buyers struggle with “Settling for something less than what you wanted. With inventory being as low as it has been over the last few years people have been going for a house that doesn’t exactly fit all their needs. For example, it might not have a second full bath they really wanted.”
He went on to say “On the opposite side of the coin are people who stretch beyond their means to get the house they want. The realization then is that their lifestyle needs to change once they see how tight their finances have become. Going out to dinner and other nonessential expenses get cut back. Directly tied into that would not be having enough in savings put away for any emergencies or unexpected expenses.”
So let’s explore the points Bill has raised, and more.
Macro Struggles First-Time Homebuyers Face
Let’s start by taking a look at the first-time homebuyer struggles about which, at a personal level, we can do little to nothing. These are the broader social and economic issues that have an impact on the majority of homebuyers but are especially hard on the first-timers.
The Availability Of Housing Stock
The number of homes currently on the market is considered relatively low. When you add to that the fact that many of the available properties are at the higher priced end of the market and you have a double whammy for first-time buyers.
Why Are There Fewer Homes On The Market?
Traditionally, the period of January through to March sees a lower level of homes on the market, but this is not the issue at the moment. Even adjusting for seasonal variation there is a smaller pool of homes from which to choose.
Mortgage Rates – Existing Homeowners
After the housing bubble burst, homeowners, in general, became warier of variable loans which had the potential to cause their monthly payments to rise significantly. As a result, more buyers, and those who were renewing their loans chose fixed-rate mortgages which establish a monthly payment which stays the same for the term of the mortgage.
This in itself is not an issue, but when it is combined with rising interest rates, it can become a problem.
Imagine you are a homeowner with a fixed rate mortgage at 3.5%. You are considering selling your home, but the best rate you could get on a new mortgage would be 4.5% which will increase your monthly payments. The better option may be to sit tight until your fixed rate term ends, your mortgage is paid off, you have an increase in income, or you have to move for some reason.
A significant number of homeowners are in this position, and as a result, their homes are not coming onto the market.
Mortgage Rates – First-Time Buyers
Mortgage rates peaked slightly in October 2018 and have been falling gradually since. However, many first-time buyers extend themselves to the very ends of their finances, and even the slightest raise in a mortgage rate can cause their budget to spiral out of control.
Consequently, first-time buyers are more likely to be turned down for a loan when interest rates rise.
There is still a relatively high percentage of homes where the property is now worth less than the mortgage held against it. These homes, where the owner would suffer a financial loss if there were sold, are said to be “underwater.”
In addition to the general issue of the higher number of homes which are “underwater,” there is the problem that these homes tend to be at the more affordable end of the market. This results in even fewer properties from which first-time homebuyers can choose.
Owner – Renters
Finally, there is the rise of the owner-renter. These are the homeowners who previously would have sold their “starter home” when they moved up the property ladder. However, today a significant number of these owners are choosing not to sell, but to rent their “starter home” and buy a new house.
Yet another contributory factor to the low housing stock.
It is not just the lack of housing stock which affects most house hunters in some way while being a significant struggle for first-time homebuyers.
The Job Market
While the unemployment rate has been steadily dropping since 2010, fewer first-time buyers have the work history or stability to qualify for a loan.
Sluggish Wage Growth
US wage rates are rising, but that is not the only metric that counts. Household expenses are also increasing, as are property prices. As a consequence, although a buyer may have more money in their paycheck, they also have to stretch it further than ever before, while rising prices place more and more homes out of their reach.
Other “Big” Issues
As if all of this wasn’t enough, first-time homebuyers also have to contend with:
- Baby boomers who want to protect the value of their homes and so oppose housing developments that might change their neighborhood.
- Gentrification of traditionally affordable areas removes housing stock from the “first-time buyer pool.”
- The “gig” economy encourages multiple flexible jobs and income streams which in-turn prevents many of this demographic, which is also the prime first-time buyer demographic, from obtaining mortgages.
- Student Debt is at a higher level now than ever before. The average graduate owes between $60,00 and-$80,000 when they graduate, with some, for example, some dental or pharmacy majors have as much as $250,000 debt by the time they graduate.
Not only does student debt make it difficult to save for a down-payment, but it also affects your debt to income ratio, which in turn can prevent you from scoring that mortgage offer.
It’s not all doom and gloom though. Although you are in no position to fix any of these elements yourself, there are other struggles for first-time homebuyers which you can work on.
Struggles First-Time Homebuyers Can Alleviate
The final point in the last section, student debt, is actually a useful segway into the ways in which you can minimize your struggles as a first-time homebuyer. To do this, you must develop the habits of an effective homebuyer.
Planning To Buy
The problems encountered by first-time buyers begin well before they even start looking for their first home.
Saving For A Downpayment
Many first-timers struggle to save enough money for a down payment, especially if they are burdened with student debt. It can feel impossible to put aside even a few dollars each month and that, in turn, can make saving for a down payment an impossibility.
Add to this the fact that rents are rising, as are home prices and you have a far from optimal deposit building environment.
There are several loan programs which may help first-time homebuyers over this hurdle. Explore special loan programs: There are a number of low or no deposit mortgage programs available which can address some of the “saving for a deposit” battles.
- FHA Loans – These mortgages are not issued by the Federal Housing Administration. Instead, the FDA guarantees the loan so that if a borrower defaults the lender is not left out of pocket. FHA Loans require a 3% downpayment and are more flexible over credit scores.
- VA Loans – This program provides no-deposit mortgages for members of the US military who are on active duty, members who have been honorably discharged, the surviving spouses of those killed in the line of duty and members of the Reserves and National Guard who have served for at least six years.
- USDA Loans – These mortgages are backed by the US Department of Agriculture. Also known as The Rural Loan, many first-time buyers mistakenly believe this mortgage is only available to those home buyers who are purchasing in rural areas. Many suburban areas also qualify, so it is worth investigating.
- The HomeReady™ Mortgage – Backed by Fannie Mae, This program requires only a 3% deposit, and you can use the income of everyone in the household to calculate a loan amount.
- “Piggyback Loans” – These mortgages are only extended to those with excellent credit scores. As the name suggests, you have two loans. One is an 80% mortgage, one is a 10% loan, and the remaining 10% is required from you, as a deposit.
- Conventional Loan “97” – Available from Fannie Mae and Freddie Mac the conventional loan program allows first-time homebuyers to finance their purchase with just a 3% deposit. This leaves them with a 97% mortgage, hence the 97 in the loan name.
Low Credit Scores
There are a shockingly high number of people who only discover they have a problem with their credit score after they have found a house, had an offer accepted and applied for a mortgage. It is critical to take a look at your score now. The first reason is to ensure there are no mistakes, which often take quite a while to fix. The second reason to check your credit score now is so that you have plenty of time to work on raising your score if it is less than optimal.
A Lack of Home Buying Knowledge
A recent poll showed that 71% of homebuyers were concerned about making a mistake, or overlooking some crucial element of the purchasing process. These buyers said they struggled with the number of people involved, what was supposed to happen when, who was responsible for what, and how they were supposed to know if they were doing the right thing.
Despite thee being plenty of information available, most people in the survey said they had trouble either trusting the source, for example, would the real estate agent tell them the truth? or finding everything they needed, in clear, simple language, all in one place.
I am not sure if it is a cultural shift that is occurring but there seem to be more people, in general, who have trouble accepting decisions which do not go as they want. This is a struggle first-time homebuyers often run up against when applying for finance. In particular, they struggle with getting documentation in order.
When a lender asks for documents X, Y, and Z, it doesn’t matter if you do not understand why they want them. It makes no difference to the loan officer if you can’t get such and such an item for another couple of weeks. When it comes to mortgages rules are rules, and no amount of fighting against the system will change it. So, ensure you have everything you need, well ahead of time and you won’t have to struggle with the “I am refusing your loan because you haven’t provided the requested documentation” issue.
The same goes for how large or small a mortgage you are offered. The bank doesn’t care what level of mortgage payment you are comfortable with. They will only extend an offer arrived at through a standard set of calculations.
Which brings us neatly onto:
Mindset, Knowledge, And Outlook
While there are many struggles against which you can kick and scream until you are blue in the face, but it won’t make a difference, there are some over which you have some control. Most of these come down to being thoroughly prepared for every eventuality, knowing all you can about the property purchasing process, and learning to be flexible.
As Bill Gassett of MaxRealEstateExposure.com told me, many, many first time buyers struggle with the realization that they will have to compromise on what they want in a home. This might be location, number of bedrooms, quality of finishes, anything really. The detail of what was compromised is less important than the struggle buyers have with the principle of compromise.
To avoid this take the advice, Bill shared in his article First Time Home Buyer Tips. In it, he discusses not only the importance of knowing what you want but also of prioritizing your wants and needs and knowing you are unlikely to find a home which has it all.
The Time It Takes To Buy
It is often, not until you begin your home buying journey, that you realize just how long it can really take. Just because you are a first-time buyer and do not have a home to sell, doesn’t mean you will:
- Quickly find a suitable property
- Have your offer accepted
- Not have to negotiate, sometimes for weeks
- Receive a favorable appraisal or home inspection
- Get the mortgage offer you need, even if you have a pre-approval.
- Buy a home where the seller can move out quickly
And they are not the only things that can put the brakes on your speedy house-hunter to homeowner transition.
The solution to this is to, as soon as you can, prepare yourself to be in the best possible position to buy. Then, approach the process with the knowledge that you may be in it for the long-haul and that your moving in date is going to be more than 30 days in the future.
Devoting Time And Effort To The Process
In a similar vein is the struggle to carve out the time to buy a home. With a social life, if you still have one after having to save for your deposit, of course, work, and family commitments it can be challenging to find the time for home buying. However, if you want to be successful, find the time you must. Otherwise, you are in for an uphill struggle.
Prioritize the time to go to open houses, set up and attend private viewings, sit down to go through the home inspection report and discuss the impact it has on your offer, and most importantly of all, respond to people promptly.
The first-time buyers who struggle to make buying their home a priority will lose out to other buyers who do.
Understanding All Of The Costs
The first time they buy a home, most people are surprised at the costs associated with the process. While most buyers set aside their downpayment, the costs of home inspections, appraisals, lender fees, title or legal fees, escrow fees, and interest often come as a nasty surprise.
For most sales, it is wise to set aside between 2% and 5% of the property purchase price, for the additional costs.
If you are struggling to cope with these costs, it is wise to consider if you should be buying a home at all.
Not Over Stretching Your Wallet
Which brings us to overstretching your finances. For the majority of homebuyers, there is a tendency to find out what is the biggest mortgage you can get and look for a home in that price range. However, just because you can do something, doesn’t mean you should. If you extend yourself so far that your finances hang by a thread, not only will you be sunk if there is a sudden repair bill or a change to your income, but you will also be worried about money, and consequently miserable all of the time.
When you are looking around that shiny new condo with the granite counter-tops, and the designer faucets weigh up whether sitting in your condo night after night, unable to afford to go out and worried about the next mortgage payment is a suitable trade-off for a flashy kitchen.
Knowing The Difference Between Price And Value
A concept that many homebuyers, not just first-timers, wrestle with, is the difference between price and value.
Price is what the seller asks for, or the buyer pays for something, but when it comes to property, there are two different kinds of value – market and appraised.
Well, your lender will send an appraiser to the home you wish to buy. That appraiser will walk through and around the property, filling in a standard appraisal form as they go. The appraisal does not take into account the tidiness of a home or the choice of paint color on the walls; the appraiser looks at elements such a the number and size of bedrooms. In addition, they will look at comparable local properties. All of this information is brought together and used to determine an appraised value.
Market value is whatever someone is prepared to pay. So, for example, if a home is on the market for $350,000, this will be the sales price, and if the buyers eventually pay $360,000, this is the market value.
The issue first-time buyers struggle with is that if the appraised value is less than the amount they have offered, the lender may not extend a mortgage offer, even if you can afford the loan repayments and have a deposit.
Have you seen those DIY or house flipping shows on HGTV? How many times have you seen a grubby looking house turned from an ugly duckling into a glorious swan?
You do not need to have extensive skills and a bottomless pit of money to turn an “almost” property into something that could become just what you are looking for.
Those who struggle to see past the here and now look of a home may be missing out on a fabulous opportunity to own the home of their dreams.
Think About What Matters
A parallel struggle for would-be homeowners is knowing what to look for when you are buying a house. In a world of Pinterest and Instagram, where the beautiful properties of internet influencers set us unattainable standards, house-hunters can fixate of whether the house is on trend and not on the structural integrity and other, less obvious features.
This struggle is especially tricky for my fellow millennials, the generation who make up the majority of first-time homebuyers. Being bombarded, all day, every day, with photoshopped images of perfection, the reality of what is on the market and what they can afford is a significant hurdle to overcome.
Listen To The Experts
As soon as you begin the property search, you will discover that everyone you know is actually a closet property expert. Your parents will give you well-meaning advice which may have been relevant when they bought their first home but is way out of date for today’s market.
Friends, neighbors, relatives, the people at work, every single one of them will have a piece of advice. Within a couple of weeks, you are drowning under huge waves of information, much of which conflicts with other things you have been told, or is just downright incorrect.
When you are buying a home, listen to the real experts.
Take the time to find the right real estate agent for you and your search, to talk to multiple loan officers, and to listen to what the home inspector tells you.
It can be difficult, but struggle through the unsolicited advice and focus on what the experts are telling you.
Staying On Track Until You Have The Keys
You make an offer, it has been accepted, the loan is approved, and in just a couple of weeks, you’ll be moving into your very first home.
What could possibly go wrong?
There are multiple ways to have your mortgage pre-approval revoked. The most frequent reason is that an overexcited almost homeowner has gone rushing out and bought furniture, electronics, or other expensive items on credit and thrown their debt to income ratio out of alignment.
I know it is difficult but hold back those urges to make your mark on your new home until after the contract is signed and the money has been handed over. Until that point, it is always possible to fall at the last hurdle.
The struggles of first-time homebuyers are very real and don’t let anyone try to tell you otherwise. In today’s economic climate there are fewer people ready to move out of homes at the affordable end of the market, greater personal financial uncertainty, and more hoops to jump through for a home loan than ever before.
Some struggles are beyond an individual buyers ability to address, but many of the problems with which first-time homebuyers find themselves grappling can be mitigated through careful planning and arming yourself with plenty of open-mindednesses, time and knowledge.
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.