US first time buyers struggling as prices rise and supply fails to keep up with demand

Prices are rising, demand is up and first time buyers are struggling to get on the housing ladder. An everyday part of British life you might think, but this scenario is from the United States.

The latest research and index figures shows that first time buyers are facing stiff competition as they simply cannot afford to buy. In particular those who have student debt after graduating are increasingly unable to afford to buy a home.

Figures from property firm Zillow show that so called entry level properties which are typically the kind of home a first time buyer would purchase have increased by 8% in the last year, twice as fast as more expensive properties.

The data also shows that there are far fewer entry level homes on the market with supply in this sector down by 9% year on year.

It means that in the current housing market in the United States buyers looking for the most expensive homes will find slashed prices, more options and less competition. It’s a much different story for first time buyers, who will be up against rising prices, low inventory and tough competition, with homes selling over asking price in many of the nation’s hottest housing markets.

So it should come as no surprise that new research from the National Association of Realtors (NAR) has found that the vast majority of would be first time buyers in the United States believe they can’t afford to buy because of student debt.

Some 71% of non-home owners repaying their student loans on time believe their debt is hampering their ability to purchase a home, and slightly over half of all borrowers say they expect to be delayed from buying by more than five years.

Lawrence Yun, NAR chief economist, said that the survey findings bring to light the magnitude student debt is having on the housing market. He pointed out that while obtaining a college degree increases the likelihood of stable employment and earning enough to buy a home, many graduating with this debt are putting home ownership on the backburner in part because of the multiple years it takes to pay off their student loans at an interest rate that’s oftentimes nearly double current mortgage rates.

These affordability issues come at a time when existing home sales in the United States increased in May to their highest pace in almost a decade and median sales prices reached an all-time high.

All major regions except for the Midwest saw strong sales increases last month, the NAR figures show. Sales are now up 4.5% from May 2015 and are at their highest annual pace since February 2007. But the share of first time buyers was 30% in May, down from 32% both in April and a year ago. And this is despite the US seeing a sustained period of ultralow mortgage rates.

Yun explained that sales are being kept up by home owners realising the equity they’ve accumulated in recent years and finally deciding to trade-up or downsize. Repeat buyers using the proceeds from the sale of their previous home as their down payment are making up the bulk of home purchases right now.

There is also a lack of supply. While total housing inventory at the end of May rose 1.4% to 2.15 million existing homes available for sale, it is still 5.7% lower than a year ago. New home construction has crept but it is not keeping up with demand and Yun believes this is also severely limiting choices and pushing prices out of reach for plenty of prospective first time buyers. Choice is particularly limited in the affordable homes sector.