Is This the Right Time for First Time Home Buyers?

(March 6th, 2008)

The last decade has seen a stellar growth in home inventories being sold in America and prices going higher. Many young people though were still in school and could not afford to purchase homes during this time. The aging baby boomers smiled as they cashed in the new equities built up in their homes and used this excess cash to further drive up home prices. But that real estate boom is now busting as home prices fall and the American economy plunges into recession. Is this the right time for young people and first time home buyers to cash in on this opportunity? Unfortunately, the answer is no!

One of the reasons is that the banks have sworn not to lend mortgages to anyone who has a down payment of less than 10%. Between 2001 - 2005, many banks & mortgage brokers were more than willing to give away mortgages to people who had down payments of less than 5%, or even 0%. This was done so as to cash in the fast rising housing market. Now that they have realized that these sub-prime borrowers cannot repay their loans, banks have cut out lending loans to such people. In order to purchase a home in the current market, a buyer would need atleast a 10% down payment as well as a credit score higher than 650. Banks will also place a closer scrutiny on your employment and will want to know for how long you have stayed at your old residence and whether you have been able to afford the rent payments. If history indicates that you have flipped residences many times over the past 1 year, this may mean you are a risky borrower and the banks will not want to lend money to you.

First time home buyers would therefore be better off accumulating a larger down payment whilst they are renting. This is better than jumping into a real estate market that could further weaken as the American economy plunges deeper into recession. Lenders will look at your debt-to-income ratio to determine whether you are a risky borrower. If you have credit card debt, high student loans as well as auto loans, you will get rejected for a mortgage loan.

What if you do have a down payment of more than 10%? Well then the answer depends on if you are willing to take the risk of further downsliding home prices. While falling home prices is like a blessing for first time home buyers, they also create a ton of risk. The median price of a home fell 3.3% in 2007 in America, according to the National Association of Realtors. In some markets such as Florida or California, home prices have gone down as high as 10% - 12%! With the adjustable mortgage interest rates resetting in the near future, a further wave of home foreclosures threaten to drive home prices further for the rest of 2008. And no one is certain when prices will stop sliding.

One reason why young homebuyers with down payments of between 5 - 10% should not purchase homes right now is because prices could decline futher by 5 - 10% in 2008. If this happens, you will owe a mortgage that will be higher than the current value of your home, thus depressing first time buyers and discouraging them from making payments. This could potentially lead to further foreclosures. Dr. Anthony B. Sanders, Prof. of Finance & Real Estate at Arizona State University quotes, "Certainly, there is a chance that the housing market has hit the bottom, but this is not a bet that first-time buyers should be taking."

Young first time buyers should also realize that they are in the early stages of their careers and may relocate their residences for better job opportunities elsewhere. This means they will sell their homes a lot faster than they think, and in the current mortgage market, prices will dip down even further giving them a capital loss. That is not worth it! If it so happens that a homeowner sells his home that has negative equity (meaning he owes more mortgage than what he can sell the house for), getting out of the deal will become extremely difficult. The owner will be required to pay off the owing mortgage at the time he sells his house. If the mortgage cannot be paid off, it will be extremely difficult to sell the house.

Bankrate.com quotes, "First-time homebuyers tend to move on fairly quickly. Buying at a time like this, they run the risk of being immobile." Be aware that there are states in America where the prior real estate boom did not take its toll as much as it did in California or Florida. In this depressed mortgage market, there are some states where home prices have not gone down one bit and have shown moderate growth. These states include Texas, Utah & North Carolina. If you are a first time home buyer looking to get into the market, these states are a good option.

Another market where home prices are solid and not falling down is Seattle. If you are a first time home buyer with a down payment of atleast 10%, stable employment history and not about to relocate within the next 5 years, Seattle could offer a market that has relatively very low risk. Even if prices do fall down, you can ride it out and wait to sell your house when the mortgage market recovers.

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