Move Over First-Time Home Buyers

The National Association of Realtors reports that first-time buyers have accounted for 29% of home transactions so far this year, whereas they typically have represented roughly 40% since the 1980s. So what does this 11% reduction mean?

No one will argue that the first half of this year the real estate market was booming with higher prices, low inventory and multiple offers, but with the recent rise in interest rates and a slowdown in July will new first-time buyers continue to be pushed out of the market?
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The average size of a new home now exceeds the lofty levels reached during the housing boom, the latest indication that the new-home market is catering more to older, more affluent buyers and less to younger and first-time buyers.

During the finance and housing downturns, many home builders downscaled and built smaller and less expensive homes in response to an era of frugality. But that has changed, especially for upscale buyers who are purchasing their second- or third-generation home and account for a greater portion of deals. First-time buyers, meanwhile, have been sidelined by more-stringent lending standards and rising interest rates.

Data released by the Census Bureau this month confirmed the trend and showed that the average size of a new home was a record 2,642 square feet in the second quarter, eclipsing the record of 2,561 square feet set in the first quarter of 2009. The average size has bounced between small gains and declines for more than a year, but the 5.2% jump in the second quarter was the largest quarter-to-quarter gain since the Commerce Department began tracking the data on a quarterly basis in 1987.

While economists say move-up buyers have been emboldened by factors such as job stability and rising stock-market wealth, the same isn’t true for first timers. “The first-time buyer now has to come up with 20% down payment and a pristine credit score, and that’s harder to do,” said Stephen Melman, director of economic services for the National Association of Home Builders. “If the [remaining] buyers are trade-up buyers, you’re going to end up with larger, more expensive homes.”

Already, rising rates sapped new-home sales in July, which the Census Bureau reported Friday had declined to a seasonally adjusted 394,000, a larger-than-expected slide of 13.4% from the June figure. Some builders predict buyers will seek slightly smaller houses to stay within their budgets
Perhaps if builders reduce the square footage of new homes first-time buyers that have been sidelined will be able to get into the market.

What do you think? Are you seeing fewer first-time buyers realize the American Dream of homeownership?

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