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Affordability Key for Selling to First-Time Home Buyers

Home builders with an eye on the first-time buyer market may not want to design their product too much differently than the homes that are being built for move-up buyers, but they definitely will want to put the accent on affordability, according to an NAHB analysis of characteristics of first-time buyers from the 2005 American Housing Survey from the U.S. Census Bureau.

The median price of the homes purchased by first-timers was $150,000 in 2005, compared to $230,000 for the trade-up market, according to NAHB economist Elliot Eisenberg, whose analysis of the survey data is published in the current issue of HousingEconomics.com.

And while the 2.4 million homes bought by first-timers in 2005 accounted for an impressive 43% share of the homes sold that year, the large majority of them — 86% — were found in the existing home market. “Given that new homes are usually more expensive than existing homes, these results ate not surprising,” the study says.

A large majority of first-time buyers displayed a preference for single-family detached houses, although attached housing and condominiums were more popular among those buyers just entering the housing market than among more seasoned buyers, the NAHB analysis suggests, “because of their relative affordability.”

Almost 79% of those entering the for-sale housing market for the first time purchased single-family homes, while almost 11% bought townhouses and another 11% bought condominiums. By comparison, about 88% of move-up purchases were single-family, 7% were townhouses and 6% were condos.

The study also suggests that a substantial number of first-timers have the financial wherewithal to purchase a home even in today’s market, where zero-downpayment mortgages have become difficult to obtain.

Although about 30% of 2005’s first-time buyers who took out a mortgage borrowed 95% or more of the purchase price of the home, more than one-third of all first-timers obtaining a loan were able to make a downpayment of at least 20%. About 16% were able to buy the home without a mortgage, and among all other first-time buyers the loan-to-value ratio was 87%.

By contrast, about 60% of buyers trading up and taking out a mortgage loan made a 20% downpayment and 22% of those moving up were able to make their purchase loan-free.

However, first-time and trade-up buyers were surprisingly alike in their use of fixed-rate financing, which accounted for roughly an 80% share of the mortgages made to both groups. About 9% of first-time borrowers with loans took out adjustable rate loans, compared to 10% of move-up buyers.

First-time buyers obtained their mortgages at an average interest rate of 5.85%, compared to 5.73% for repeat buyers. And 14% of the first-time borrowers paid an interest rate of 7% or higher for their loans, compared to about 9% of those trading up.

Almost 56% of first-time buyers used personal savings to cover their downpayment, with no other single source of financing even remotely close, the study says. By contrast, money from the sale of the old home was the most important source of a downpayment for 53% of those moving up, followed by savings, cited by 25%.

“When it comes to choosing a house and a neighborhood, both groups are quite similar,” the study says. “Both look at an equal number of units (an average of 12) and place emphasis on proximity to work and friends when choosing a neighborhood. However, first-time buyers are more sensitive to price while other buyers are more attuned to the design and feel of the area.”

Among the household characteristics of the first-time buyers:

  • The average age of the householder was 33. Almost two-thirds were under 35 and less than 5% were over 55.

  • The average size of these households was 2.7 persons. About one-third consisted of two persons; one-fifth were single-person households; one-fifth had three persons; and the remaining roughly 25% had more than three persons in the household.

  • Average income was $64,074, compared to $84,170 for move-up buyers and $72,957 for home owners who didn’t move in 2005.

  • Almost two-thirds of first-time buyer households had incomes between 50% and 150% of their area median income, indicating that their incomes were quite typical for where they lived. Seventeen percent had incomes higher than 150% of the area median and 18% were below 50% of the median.

  • About 31% were married with children; those that were one-person households were about twice as likely to be headed by a male as a female; and those headed by a single parent were about twice as likely to be female than male.

  • About two-thirds were white, 11% were black and 15% were Hispanic.

  • About 77% had previously rented, with the remainder forming a new household in conjunction with the home purchase.

To read the NAHB report in its entirety, click here.

Want to Know the Housing Forecast for the Top 100 Metros? 

Find out in HousingEconomic.com’s 2008 to 2009 Metro Forecast (free preview).

Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.

To learn more, visit www.HousingEconomics.com.

Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown

What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.

To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.

To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.

For assistance, call the NAHB Member Service Center at 800-368-5242.

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