Fed governor: First-time homebuyers must return

3-Federal-ReserveA housing recovery is under way and Federal Reserve Governor Elizabeth A. Duke thinks it will last, though perhaps without much more steam than it has already mustered. While investors have been responsible for much of the current demand, Duke believes it is essential that young first-time homebuyers return to the housing market moving forward.

As a member of the Federal Reserve Board of Governors, Duke is expected to analyze and speak about economic data as she did during a Mortgage Bankers Association conference recently in Avon, Colo.

“I think the evidence is pretty clear that a recovery in the housing market is finally under way,” Duke said.

Why housing is strengthening

As evidence, she cited the following trends:

  • Rising national house prices
  • Increased residential construction activity
  • An uptick in housing starts and permits
  • Greater optimism among home builders
  • Higher sales of new and existing homes
  • Favorable consumer attitudes toward home buying
  • Real estate agents report more people shopping for homes
  • A decline in sales of bank-owned homes

Perhaps the biggest factor so far has been the influx of investors into U.S. housing markets.

“The combination of a low purchase price, a possible steady stream of rental income, and the potential for significant capital gains has attracted considerable interest from large institutional investors as well as from the mom-and-pop investors,” Duke said.

Household formation

Moving forward, Duke expects the recovery to be sustained by pent-up demand from new household formation, despite high levels of unemployment and lower-than-historical average credit scores among young people, who traditionally make up the bulk of first-time homebuyers.

“Household formation has been particularly weak among young individuals, who are also a large part of the potential first-time homebuyer population. Many of these young individuals have relatively weak credit records and are more likely to have had a recent spell of unemployment,” Duke said. “I also recognize that these households may be the very population that faces especially tight credit conditions.”

Tight credit conditions

Duke said credit conditions are so challenging for potential first-time buyers due to lender fears over the U.S. economy, the trajectory of house prices, a lack of capacity and a preference for making refinances–which are often easier to close–over purchases.

“As lenders gain more confidence in the strength of the economic recovery and the upswing in house prices, their outlook for home-purchase originations may brighten, making them more confident in easing standards or increasing capacity. Even so, there are still a number of nonmarket forces at work that could make lenders more cautious than normal,” she said.

Duke: We need first-time buyers

The bottom line is that the strengthening recovery Duke expects may be driven not by first-time homebuyers, but slim pickings of for-sale houses and investors eager to expand their portfolios of rental properties.

“Economic improvement will cause household formation to increase,” Duke said, “but if credit is hard to get, these will be rental rather than owner-occupied households. And without first-time homebuyers, the move-up market will be sluggish, new and existing home sales will be more subdued, and purchase mortgage volumes will return only slowly.”

That’s not great news for the future of homeownership.

HSH Associates Financial News Blog

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