Rising housing costs keep US first-time buyers on the sidelines

[WASHINGTON] Tired of renting in Raleigh, North Carolina, Lillian Rouse and her fiance started the hunt last year to buy their first home together. But after months of searching, they decided to hold off until they were on firmer financial footing.

Rouse, a 28-year-old data analyst, and Mark Debney, who is 29 and works for a tech company, make a combined US$120,000 a year, but they worried that it was not enough to cover the costs of a home they liked. They parked the money for a down payment in a certificate of deposit, which they rolled over in February, to give them more time to build their savings.

The economic uncertainty generated by the war in Iran, which began shortly thereafter, only reinforced that decision, she said.

The effects of the war have pushed mortgage rates higher and consumer confidence to record lows, making a first-time home purchase even more daunting.

After optimism in the beginning of the year that the market was strengthening, the traditional spring buying season is fizzling. Sales of existing homes, which account for the majority of the housing market, were flat in April, the National Association of Realtors reported on Monday (May 11), after falling 3.6 per cent in March.

The average home is taking increasingly longer to sell, “implying that consumers are taking their time before making decisions”, Lawrence Yun, chief economist of the National Association of Realtors, said in a statement.

Prolonged conflict in the Middle East could keep energy prices high and slow global economic growth, hitting sectors like the US housing market, Moody’s Analytics said in a recent report. Rising inflation expectations would suppress demand for homes, especially for first-time buyers, Moody’s added.

“You may not have fully seen the impact of the war quite yet,” said Cristian deRitis, deputy chief economist of Moody’s Analytics. “If it continues for a while, that will start to grind more on the uncertainty and the psychology.”

Fears of broadly higher inflation have led bond traders to bid up the yields on 10-year Treasury notes, a major influence on mortgage rates. The average rate for a 30-year fixed-rate mortgage, which dipped below 6 per cent just before the war started, has since jumped to 6.37 per cent, according to mortgage financing giant Freddie Mac.

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The median age of first-time homebuyers has risen to 40, up from 30 in 2008, according to the National Association of Realtors. These buyers made up just 21 per cent of the market last year, a record low. In part, the decline in fertility rates, which hit a new low in the US last year, has been linked to high housing costs.

Rouse said delaying a home purchase has also meant putting off starting a family. “It’s not a fun decision to have to make,” she said, noting that she and her fiancé valued the stability of growing up in houses their parents had bought. “I think it’s best that we wait to have kids until we have a house,” she said.

Younger buyers often face other financial constraints, like student loans, deRitis said. And rental costs have slowed, reducing the pressure to jump into home ownership.

When David So, a 27-year-old mechanical engineer for Hewlett Packard in Corvallis, Oregon, started looking at homes in February, he said he had “sticker shock” when he ran the numbers. He moved back to his parents’ home to save for a down payment.

“I want my monthly payments to go down,” he said, noting that it could be achieved by putting more money upfront or waiting for mortgage rates to decline.

Beyond a mortgage, other costs associated with homeownership are weighing on buyers. Property taxes, insurance and homeowners association fees can add several hundred US dollars to monthly housing costs.

The higher costs chip away at affordability for buyers, said Brad Case, chief residential economist for Homes.com, a real estate portal owned by analytics provider CoStar. Market values have risen, he said, which has pushed up property taxes. And insurance rates tend to jump after every natural disaster.

“Those have increased dramatically,” he said. And they do not include things like appliances and access to gyms that might have been included for renters.

“That’s just a matter of sketching out your entire budget and recognising that now you’re going to have to pay for certain amenities that you did not have to pay for before,” he said.

David O’Reilly, chief executive of Howard Hughes Holdings, which builds master planned communities, said first-time buyers were “choosing to wait until they can afford the community and lifestyle that they want”. In response, Howard Hughes has been telling its homebuilders that more starter homes were needed, O’Reilly said.

That could not come too soon, said Rouse, who was dismayed at the quality of existing homes on the market. “Everything was beat to hell,” she said. “We don’t have US$15,000 to do renovations.” NYTIMES