According to the 2000 National Association of Realtor’s Profile of Home Buyers and Sellers, young people buying their first home, with a median age of 32, make up a significant part of today’s housing market. An astounding 52 percent of entry-level buyers are between the ages of 25 and 34, and an additional 11 percent are under the age of 25. First-time buyers accounted for 42 percent of all home sales over the last few years. They were a driving factor in setting a new record for the housing market in 1999, and without this strong level of young entry-level buyers, people would be unable to sell their existing homes to meet growing family needs, or trade down to smaller, easier-to-maintain properties as lifestyle preferences change. In short, the overall health of the housing industry depends on this critical segment of the market.

The typical first-time home buyer in 1999 earned a median income of $49,700 and purchased a starter home costing $104,000, with a downpayment of $5,000 (4.8 percent). While 55 percent are married couples, 22 percent are single women and 12 percent are single men; unmarried couples account for 9 percent of first-time buyers. Although condos and townhouses combined make up only 15 percent of entry-level purchases nationally, they are a popular choice in high-cost housing markets where affordability is a greater issue.

First-time buyers are 13 years younger than the typical repeat buyer, and are more comfortable with using technology to search for a home and communicate with real estate agents. While the median age of entry-level buyers has been stable between 31 and 32 during the last 10 years, they are becoming more ethnically diverse because immigrants and minorities are a growing segment of the market. The foreign-born population accounts for more than 10 percent of U.S. households, up from less than 8 percent 10 years ago. Once established, these new Americans achieve homeownership rates comparable with the overall population. In addition, over half of the country’s 28.3 million second-generation Americans are under the age of 30.

Another NAR survey shows 16 percent of Realtors conduct business in a language other than English. Considering the trends, diversity training and agents who are conversant in a second language are becoming more important in reaching the growing ethnic and minority segments of the first-time buyer market.

Our surveys tell us the biggest factors influencing purchase decisions are the neighborhood and home price, followed by considerations regarding work and school, as well as family and friends. The reasons young people decide to buy include a desire to own a home of their own, to have more space and for investment considerations.

What various surveys don’t tell us are some of the underlying reasons young people decide to become home owners, but those reasons become clear when you consider the facts. With two-thirds of all households owning their own homes, many children have witnessed the advantages of homeownership first-hand. Their parents have been able to tap into home equity for tax-deductible loans to send them to school, or to use for other major expenses or emergencies.

Perhaps an ever greater factor today is the ability of potential homeowners to educate themselves about the housing market, the buying process and investment considerations at their own pace and convenience on the Internet. In fact, 37 percent of home buyers now shop for a home on-line – an 18-fold increase in only four years. Web sites such as Realtor.com give young buyers instant access to information their parents never dreamed about when they first entered the housing market.

In addition to tax savings and the ability to build equity over time, which allow them to eventually trade-up to a larger home, the investment considerations of owning a home are even more obvious in light of this year’s gyrations in the stock market. If you look at the period between 1976 and 1997, before the influence of widely swinging technology stocks, the variance in stock returns was more than 13 times the variance in home-price appreciation. That variance is even greater today.

Most sensible people realize housing isn’t a quick-in, quick-out investment, but young buyers need the facts. While homeownership may not offer the potential windfall of some stocks, over time prices generally increase at the overall rate of inflation, plus one-to-two percentage points. While it is true some markets experience occasional price declines, over the typical ownership period of seven years, these cycles tend to smooth themselves out. In fact, most people are able to trade-up to a larger home within three to five years.

Another consideration is that housing is a “leveraged buy-in.” A buyer may make a downpayment of only 5 percent, but the appreciation is on the total value of the home. A report from Harvard University’s Joint Center for Housing Studies shows a homeowner who experiences an annual price appreciation rate of 5 percent and who made a downpayment of 10 percent will experience a 175 percent rate of return in five years. A smaller downpayment will yield even greater returns.

Affordability is a critical issue for first-time buyers, who are more sensitive to increases in interest rates. While some buyers may have to lower their sights in the current market, many are switching to other forms of financing. With mortgage interest rates running more than a percentage point higher than a year ago, we’ve seen a tripling in the number of buyers using adjustable-rate mortgages. In the beginning of 1999, ARMs accounted for only 10 percent of home loans. Today, they’re around 30 percent. Even more important are programs that help buyers overcome the downpayment obstacle, such as loans insured by FHA and state or local programs targeted to low- and moderate-income first-time buyers.

While homeownership isn’t for everyone, especially for people who plan to be in an area for only a year or two, one report dramatically demonstrates the tangible benefits of owning vs. renting. The Federal Reserve’s Survey of Consumer Finances shows the median assets held as home equity by owners was $90,000, approximately 20 times the median value of all asset holdings of renters.

Although 4 out of 10 home buyers educate themselves about the market on-line, many first-time buyers don’t understand the basics of qualifying for a mortgage. For people thinking about buying a home, the first thing to do is to take a good look at their credit, to pay bills on time and start a savings plan. Mortgage payments can be fairly comparable to rent, or even less, but without good credit potential buyers can’t get a loan. There are many options to help first-time buyers, so it’s important for them to meet with real estate professionals to examine their personal situation and learn how to get started on the road to homeownership.

Many boards and associations of Realtors offer home buying seminars to the public, but it’s very important for these programs to be offered in every market across the country. In the boom times we’ve all been enjoying, it’s possible to lose sight what it takes to buy that first home and what that means for the future of the housing industry. Reaching out to young people and helping them plan to become homeowners is an ongoing responsibility we can’t ignore.

Published: June 6, 2000

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