First-time buyer crisis

One of the big worries in the real estate industry is that young families cannot afford to buy their first homes. It worries both grand social engineers and great government economists.

But those who already own homes need to be concerned the most. They need new buyers more than the economists do.

It is the constant flow of people into the home buying pipeline that keeps pressure on home prices from the very bottom of the scale to the very top. People now in ‘’starter'’ homes will never be able to move up unless novice home buyers buy them. And if the starter home people can’t move up, neither can those on the next higher rung of the ladder, and so on all the way to the mansions at the top.

Without the new buyer at the bottom, the whole process stalls. Home prices flatten, and could even deteriorate.

The first-time home buyer, therefore, is something to be cherished and protected. Instead, it is becoming an endangered species, and there is a plethora of statistics to show just how endangered it is.

In 1990, 43.3 percent of those between the ages of 25 and 29 (prime first-home buying ages) owned a house. In 1998, only 35.9 percent of the people in that range were home owners.

Similarly, in the next higher home buying range, 30 to 34, 61.1 percent owned homes in 1990. By this year that number had fallen to 53.3 percent.

‘’Affordability'’ is the key word in all this.

The price of starter homes has steadily increased over the years, from about $72,000 in 1980 to around $96,670 today.

In that same period, incomes of first-time buyers have gone from about $24,700 to $31,653.

The National Association of Realtors takes those numbers and others, crunches them through a computer, and comes up with their ‘’affordability index.'’ For last quarter, that index showed the average first-time home buyer was only making 77.3 percent of what it would take to qualify for a mortgage for the average starter home.

Although the statistics are grim for renters who still consider home ownership a part of their American dream, there are avenues open to circumvent the stats — mortgage insurance, private or government, chief among them.

The biggest obstacle — the ‘’lift into the pipeline'’ — is the downpayment.

Many lenders prefer up to 20 percent of the cost of a home as a downpayment. For a $130,000 home, that means $26,000 up front.

A lot of people these days just are not able to accumulate that kind of money. The cost of living is going up. They are paying high rents (for which there is no tax break). Many are in debt from college loans and the cost of starting a family.

Private mortgage insurance, however, can drop the cost of getting into that same $130,000 home from $26,000 to $6,500 by underwriting loans with just 5 percent downpayments. Nor does private mortgage insurance add dramatically to the cost of a loan.

For example, if a person were to make a 5 percent downpayment on a $100,000 home at 10 percent interest, the individual would pay $950 in mortgage insurance at closing, then make monthly payments of $833.69 in principle and interest, plus $38.79 in monthly mortgage insurance, for a payment total of $872.48 per month.

Another advantage of private mortgage insurance is that it can be canceled at the discretion of the lender. In other words, as inflation pushes up the value of a home, the level of the owner’s equity also goes up. When that equity reaches 20 percent, in most cases there no longer is a need for mortgage insurance.

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