First-Time Home Buyers Learn to Move Quickly in Tight Markets

May 24, 2018

Rising home prices and a slim supply of starter homes in many areas are making this spring a challenging one for first-time buyers, real estate professionals say.

The typical price of a previously owned home in March was about $250,000, up nearly 6 percent from a year earlier, according to the National Association of Realtors. The median price was higher in certain parts of the country, particularly in the Northeast and the West.

Plus, homes sell quickly when they come on the market — especially smaller, lower-priced homes. Seasonal demand is increasing as usual, but buyers are finding that there is a lack of new listings. Homes are going under contract in about a month, the association reported, about four days faster than last year.

“The starter house is nearly missing in some markets,” said Jessica Lautz, the association’s managing director of survey research and communication.

Much new construction is aimed at more affluent buyers. Plus, investors — both professional and amateur — are turning to single-family homes as rental properties to diversify their holdings, creating more competition for traditional buyers when houses come on the market, said Danny Gardner, senior vice president of affordable lending and access to credit at Freddie Mac. Freddie is one of two (along with Fannie Mae) big government-controlled mortgage finance companies.

Competition for all homes in general was particularly cutthroat in some areas, especially in Western markets like San Francisco and other California cities, along with parts of Texas and Colorado, according to Realtor.com, a listing website. The website also cites Boston as a “hot” market.

In Colorado Springs, Jay Gupta, a real estate agent, described an “unprecedented” imbalance between the supply of homes and the demand for them. Prices in Colorado Springs are rising, in part because buyers priced out of already costly areas like Denver and Boulder are seeking places that are relatively affordable, brokers say.

In April, Mr. Gupta said, the Colorado Springs market had 1,524 active listings, and ended the month with 1,286 sales. Properties selling for less than $225,000 are in extremely short supply, he said: “Those homes just aren’t there.”

Recently, Mr. Gupta said, a home was listed for $310,000. Forty people attended a three-hour open house, and the property went under contract to a buyer offering $30,000 over the asking price. The buyer, who was relocating from out of state, apparently grew tired of seeing his offers on other houses get declined, Mr. Gupta said.

In addition to daunting bidding wars in some markets, first-time buyers often have trouble coming up with a down payment.

Based on the median home price, a down payment of 20 percent — a longtime rule of thumb — would be more than $50,000. Amassing that much cash can be difficult. The average savings of people who do not own homes was $5,200 in 2016, according to the Realtors association, citing Federal Reserve data.

In reality, however, many home buyers make much smaller down payments. More than half of first-time buyers made down payments of 6 percent or less in the 12 months ending in November 2017, according to survey data from the association.

The notion that a 20 percent down payment is required is increasingly a “myth,”
Mr. Gardner of Freddie Mac

Both Freddie and Fannie, as they are known, support home loans to eligible buyers who put down as little as 3 percent. (The companies do not directly make home loans, but buy mortgages meeting their standards and package them as securities).

Freddie Mac said it would soon expand its low down payment program to broaden the pool of buyers who can qualify. The updated program, to become available this summer, will serve first-time borrowers regardless of income.
Fannie Mae was already offering its low down payment program to a broad pool of borrowers, said Jonathan Lawless, vice president of product development and affordable housing at Fannie Mae.

Here are some questions and answers about home buying in a seller’s market:

Should I put 20 percent down on a home, if I can afford it?

Making a 20 percent down payment is still a sound strategy, if you can swing it. You will usually qualify for a lower interest rate on your mortgage, and you will avoid paying for private mortgage insurance, which adds to the cost of your monthly payment.

Plus, in hot markets where sellers can choose from several bids, a larger down payment makes you a more attractive buyer, said Kelly Moye, a broker with ReMax and a spokeswoman for the Colorado Association of Realtors. In bidding wars, she said, “the ones with the biggest down payments usually win,” because they are seen as safer buyers more likely to close the deal.

Some states and nonprofit organizations offer help with down payments. You can search online for programs to see if you’re eligible.

How can I increase my chances of getting the home I want?

Shoppers should get preapproved for a loan and know what they are looking for in a home, so they are prepared to act quickly if they find one they like, Mr. Gupta said. In hot markets, you do not have time to ponder your options. Make a list of two or three “must haves,” he said — whether it’s a big yard or a nice view — and make those the priority so you can move fast when the opportunity arises. “You have to be more flexible,” he said.

What are current mortgage rates?

The average rate on a 30-year, fixed-rate mortgage was 4.55 percent as of Thursday, unchanged from a week earlier, according to Freddie Mac’s rate survey.