By Victor Normand
Published: July 2013
The 25 to 34 year old demographic typically makes up the largest percentage of first time home buyers, but they are largely absent from the scene nationally and in our market. Beset with student loans, challenging job circumstances and a conservative lending environment, these future homeowners are holed up at home with their parents or in rental units waiting for things to change.
The economy is improving, but not fast enough to deal with the unemployed or underemployed who might like to own their own homes. And lenders are cautious in making loans to those who might have good jobs with good incomes and good potential for advancement, but they have education debt (which they are managing) and only a little cash for a down payment.
That’s not to say that programs aren’t out there to help. The Governor recently announced a new initiative called the “Home Ownership Compact” to help first time buyers. Six banks in the State of Massachusetts have signed on to this initiative, which should be rolling out very soon.. However, the major players behind almost all of the mortgages made in the country — Fannie Mae, Freddie Mac, and the FHA — are effectively on the sidelines when it comes to first time home buyers as we have described them.
Expect that to change at some point, now that interest rates have begun to rise and the refinance market has come to a near halt. The big banks seem to have more influence on the aforementioned government-backed entities than your average consumer, and soon they will look for new markets to replace their lost refinance business. For those first time buyers who have good jobs, less than perfect credit (as in paying down student loans), and little cash, some creative borrowing may be in order.
In the past we have suggested that borrowing from parents may be a good option. Most 401(k) employer sponsored programs allow participants to borrow from their own accounts; often with very low interest which accrues to the participant. Even IRA’s funded by a potential first time home buyer allows contributors to take penalty free distributions for the purchase of a home. Given the low rate of return on these accounts, an interest bearing loan to a first time home borrower can be a good investment. Get the facts to see if it’s a good option for you.
Recently, we have shown that the purchase of a condominium can be a good investment. In fact, in our market, most condominiums priced under $175,000 are being purchased by investors, usually with cash. Unlike recent single family home sales, which have been showing increasing price appreciation, condominium sale prices continue to decline, while rents on these units have been increasing. On the basis of an income approach to value alone, sale prices for condominiums will eventually rise.
Every real estate deal is unique with different criteria involved depending on the condo complex. Ratios of Owners vs. Renters come in to play along with knowing what specific type of financing might be available. Trust a “Resident Expertsm,” to apply their knowledge and expertise to insure a smooth transaction. You’ll move quickly through the potential pitfalls and learn something about the real estate market. It’s what we know that makes the difference.