Progress has been slow, but existing-home sales nationwide started to move upward in April, by 1.3 percent, according to figures released on May 22 by the National Association of Realtors (NAR).
But first-time homebuyers haven’t been part of that good news.
According to an annual survey by the NAR, the percentage of first-time homebuyers slipped to 38 percent of the market share — down from 39 percent in 2012. In 1981, four out of 10 purchases were first-time buyers.
Experts believe many factors are contributing to this decline — the high unemployment rate, young adults’ desire to live in a more urban setting and high loads of student debt. They have become, in effect, risk adverse.
Data from the Federal Reserve shows that in 2012, young people with student debt had lower homeownership rates than people without student debt — which wasn’t the case in the nine years before.
Student debt nationwide has topped $1 trillion, while entry level wages have fallen by 5.4 percent over the past decade, according to the Economic Policy Institute, a Washington, D.C.-based think tank.
This has some fearing that young adults are having a hard time qualifying for mortgages and saving for down payments.
“Historically first-time buyers are instrumental in housing recoveries because they help existing homeowners sell and make a trade,” Lawrence Yun, chief economist for the NAR, said in November.
A compounding problem
Randy Henkle, senior vice president of loan production for Iowa Bankers Mortgage Corp., said that while student loans can help establish credit over the long-run, they also can hurt graduates’ mortgage applications in the short-term.
“It’s significantly different from five years ago — if you had deferment, it didn’t count as debt,” he said. “But that’s changed.”
Now if a graduate applies for a mortgage and has taken out student loans, a bank assumes that the applicant is making loan payments — even if he or she isn’t. And that can mean the applicant is a liability.
“A tighter credit box exists today, too,” Henkle said.
Compounding this problem is that graduates often don’t have much in savings, he said, because they are paying down students loans and not saving for a down payment.
“It slows down the housing market,” he said. “And when entry level buyers aren’t buying, then there’s not as many repeat buyers. It’s a chain reaction.”
It’s not uncommon for students to graduate with $40,000 or $50,000 worth of debt, he said.
“I’ve seen people with as much as $250,000 in loans,” he said.
According to a December 2013 report by the Project on Student Debt, an initiative run by the Institute for College Access and Success not-for-profit, seven in 10 college seniors in who graduated in 2012 had student loan debt, with an average of $29,400 per borrower.
Iowa closely mirrors the nation’s percentages, with 71 percent of students graduating with student loans that average $29,456.
From 2008 to 2012, the combination of debt at graduation, the amount of federal and private loans increased an average of six percent each year.
Tony LaRosa, manager for Mid-Iowa Credit Counseling, said he believes this is happening because students are using loans to pay for more than just tuition, including class materials, living expenses and entertainment.
“When many students graduate, they do so with very high debts,” he said. “In some cases the cost of the education for a particular career field does not pay a sufficient income to cover reasonable expenses while paying off debts.”
Henkle pointed out there are programs available to help first-time homebuyers, including the Iowa Finance Authority and community banks.
In fact, First Federal Credit Union in Hiawatha rolled out a college graduate homebuyer program in April. The program eases down payment guidelines, provides flexibility when it comes to employment requirements and offers reduced interest rates and closing costs.
Tom Chalstrom, president and CEO, of the credit union, said the company designed the program to help
“There’s not a lot of quantitative data,” he said. “But you have to assume debt is affecting affordability.”
This means that young adults who are buying homes may be buying them later in life, or smaller ones, than in the past.
“This generation looks at their parents’ generation and sees nice homes with three-car garages. They aren’t going to be able to afford to have those opportunities,” he said.
Several people have been able to take advantage of the program since it started, Chalstrom said, but the credit union is still working to educate real estate agents that it’s available.
To qualify, young adults must have graduated within the past three years and have at least a two-year degree.
“It allows young people to establish roots in the area,” he said. “If we can get people to purchase a home and establish roots, they can stay here for a while.”