An inside look at Chicago real estate

Big Investment Companies to Blame for First-Time Home Buyer Decline

By
Steve Bergsman
   | Home Ownership

First Time Home Buyers

The percentage of sales to first-time homebuyers has been slumping, and at least one market observer says that’s not a bad thing.

Normally, housing markets prosper when first-time homebuyers are active. That’s because existing homeowners in moderately priced homes can move up to a bigger house as there are buyers to take them out of their starter homes.

However, these are not normal times in the housing market and potential homeowners want to be patient before deciding to take that first step.

At the end of 2012, a National Association of Realtors survey reported 31% of sales were to first-time buyers – a weak number considering first-time buyers usually represent 40% of the market.

Chris Martenson, whose website “Peak Prosperity” focuses on social and economic change, took a look at the first-time homebuyer market and believes patience is now the better game.

The percentage of first-time home buyers has fallen by 25%, he says, and there are some basic reasons for this including: most lenders require a 20% down payment; credit conditions are very tight; and there is the extra cost of mortgage insurance.

The bigger problem, he stresses, involves unique market conditions.

The real roadblock for potential homebuyers is the entry into the starter home market by giant institutional capital aggregators such as BlackRock Inc., the New York-based investment management corporation.

These companies represent massive pools of capital that have been using cash to purchase tens of thousands of lower-end homes, which are being converted into rentals. The mass purchases have put pressure on housing prices that in some markets have jumped 10% to 23%. In Phoenix, where investors came, saw, and conquered, year-over-year price gains as of March hit 22.5%. (In the same period, Chicago home prices moved up 7.8%.)

“If you are a first-timer and you scrape together your 20% down, you will probably be outbid by a BlackRock,” says Martenson. “Then prices go up and you have to save more money to get to 20%.”

Things should get better, Martenson adds, “I don’t think companies like BlackRock are going to find the returns in single-family homes as excellent as they hoped. We are already seeing some of the earliest entrants exiting the market. This story is getting long in the tooth.”

Will a change of mindset by the big investment firms happen soon?

The market may be different come autumn, he says. “There are some global economic data points that are weakening and that could change things.”


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