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posted on 13 March 2016

Dearth Of First-Time Home Buyers Slowing Recovery?

from the Atlanta Fed

The economic recovery is missing a key ingredient: real estate. That's because real estate is missing a key ingredient: first-time home buyers.

Jessica Dill, an economic policy analysis specialist at the Federal Reserve Bank of Atlanta, said:

Many people will tell you that first-time home buyers have disappeared.

The number of people buying a first home declined more than 50 percent from a peak in 2003 to its trough in 2011. Volume has rebounded but remains well below historical norms.

Various factors are keeping those buyers away. Student loan debt burdens are one factor that's received considerable attention. Research by Dill and other Atlanta Fed analysts suggests that, rather than preventing purchases, student loan debt delays first-home purchases. In fact, on average, first-time buyers have gotten younger: 33 years old in 2014 compared with 35 in 2001, Dill noted.

Economy, location, location, location matter to first-time buyers

Major hurdles for first-home buyers include local economic conditions and tighter mortgage lending standards, Dill said. For example, the largest declines in first-time buyers from 2001 to 2011 were in California and Florida, states that experienced severe housing bubbles and busts.

Meanwhile, tougher lending standards have contributed to a far bigger share of mortgage loans going to borrowers with high credit scores, Dill pointed out. People with credit scores over 750 have accounted for more than 60 percent of mortgage originations since 2008, up from roughly 35 percent between 2000 and 2008, according to data from Lender Processing Services Applied Analytics.

A dearth of rookie buyers makes it more difficult for existing home owners to sell their houses and trade up. The muted housing market has in turn sapped the economic recovery. To illustrate: Before the Great Recession, real estate broadly defined accounted for 8.4 percent of total economic activity as measured by gross domestic product (GDP), Dill said, citing data from the U.S. Bureau of Economic Analysis. Since the recovery began in mid-2009, real estate has made up just 5.9 percent of GDP.

That might not sound like a huge decline. But in a roughly $17 trillion economy, a few percentage points means hundreds of billions of dollars. Click the link to the right to view slides from Dill's presentation and to learn more about the Atlanta Fed's Center for Real Estate Analytics.


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