First-time home buyers facing one of the least affordable markets on record

My first-time home buyers have been having difficulty over the last couple of years.

During 2021 and 2022, when the housing market was scorching hot, it was tough for first-time home buyers, often with FHA 3.5% downpayment loans and other low downpayment loans, to compete with the all-cash and conventional loan buyers. FHA and VA loans can be a trickier and sellers generally like to avoid the trouble when multiple offers are on the table.

Although I have had pretty good success over the years representing buyers, by convincing sellers that it is worth it to sell their home to a military family or other young family looking to make a long-term home.

But, no doubt, the last few years have been tougher for first time home buyers, especially when many offers come in over list price and often with a no-fuss, 21-day close, something FHA and VA buyers can not typically achieve. In 2022, first-time home buyers made up the lowest proportion of all purchasers in decades.

Now we have a different situation for first-time home buyers.

Over the past four weeks mortgage rates have again been surging upward, nearing 7% for well qualified borrowers. This has caused mortgage applications to plummet to a near 30-year low for first-time home buyers (as well as other purchasing groups).

Today, first-time home buyers are facing one of the least affordable markets on record.

Because this buying group generally has a higher loan to value amount, they are most sensitive to interest rate increases and the higher rates are resulting in less they can afford. Loan officers typically work backwards, starting with income and debt payments to generate a maximum monthly payment for a buyer. As interest rates increase, that same monthly payment can afford less and less of a home price. Compared with a year ago, when rates were in the 4% range, a monthly payment today is about 50% higher for the same loan amount.

Interestingly, home prices are staying fairly steady, with only minor decreases since the highs of last summer.

Another issue is that the supply of lower priced properties is extremely low as those property owners are not bringing those properties to market very often, instead holding on to their mortgage rates in the 3’s and 4’s.

When a desirable, lower priced property does come on the market, quite a few offers come in, and often an investor will scoop it up. Inflation is causing investors to purchase the more affordable single-family properties as a hedge against the persistent inflation, further boxing out first-time homeowners. The median age of first-time home buyers has increased steadily to 36 years old nationally and even higher here in San Diego.

One thing I tell my first-time home buyers to do is to first get approved by either my mortgage loan person, Margaret, an amazing lady and longtime loan officer or a loan person of their choice. I currently have a lender offering down-payment and closing cost assistance grants in some areas of San Diego.

I also suggest considering a townhome or condo for a few years, until rates hopefully decrease. This way they have a hedge against inflation and have likely tax write-offs against their income going forward.

Another option is an interest-only loan for a few years which requires lower monthly payments. I also strategize with buyers on considering fixer properties.

Call me with any questions on buying or selling real estate in San Diego.

– Sarah Ward is a REALTOR with Coldwell Banker West. Reach her at: sarah@sarahdoesrealestate.com.

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