First-Time Home Buying: Effects of the Subprime Meltdown and Opportunities for Buyers
By Luz E. Monarez
REAE 5311
Buying a house for the first time is always nerve-racking, but trying to do it in an unstable economy can be even more harrowing for buyers. During the housing boom of the late 1990’s and early 2000’s, first-time home buyers had little to worry about. Even with bad credit history, loans were easily obtained, usually with no down payment, little to no upfront costs, and few income verifications. Credit was effortlessly being extended to high risk borrowers who wouldn’t have otherwise been able to afford a home.
Living the American dream was easier than ever to attain. But then the inevitable happened, the subprime mortgage collapse. As a result of the collapse, we have seen the supply of homes increase significantly, lenders have restructured their financing policies, property values have drastically decreased, and the economy has slid into a recession, which has prompted government involvement. All this has left first-time home buyers sitting on the sidelines wondering if they’ll ever have the opportunity to own their own home and live the American dream.
Strict Lending
By early 2007, foreclosures and interest rates continued to rise to the highest levels seen in years. Subprime lenders were no longer capable of financing new loans, which helped lead to their demise (Bianco 12). Subprime loans now are nearly unheard of. Nowadays, it is extremely difficult to obtain a conventional loan without a hefty down payment or excellent credit rating. Lenders are reverting back to the old way of doing things and requiring that buyers have a twenty percent down payment and a credit score above 680.
Even with substantial down payments and excellent credit scores, buyers must meet lenders rigorous income verifications. Because of the credit crunch, lenders are staying away from stated-income loans, which require little to no documentation. Now, in order to qualify for a conventional mortgage, lenders require extensive documentation such as a list of all creditors, the last two or three pay stubs, W-2’s and income tax returns for the previous two years, and bank statements going back two months.
Fence Sitters
Even though first-time home buyers accounted for 41 percent of buyers in 2008, according to the National Association of Realtors, the new painstaking lending standards coupled with a dwindling economy and mounting job losses are causing some to sit on the fence (Pilon D1). Buyers are afraid that the real estate market has not yet hit bottom and property values will continue to decline. They are fearful of purchasing a home only to end up owing more than the home is worth if their property value decreases (Lazo D01).
The fragile state of the economy has wreaked havoc on consumer confidence causing them to be afraid to buy, spend money, and/or invest. As Guy Cecala, publisher of Inside Mortgage Finance Publications said, “If people are scared to put money in the bank, they are going to be scared to make a big transaction like a house purchase” (Merle A01).
According to the National Association of Realtors’ housing affordability index – based on whether or not a typical first-time home buyer could qualify for a mortgage loan on a typical home – affordability is now at an all time high. Unfortunately, even though buyers can afford to purchase a home, they are still hesitating to jump into the real estate market. Nonetheless, if first-time home buyers do find the confidence to come back into the market, 2009 may be a great time to buy (Samuelson A17).
Buyer’s Market
At the end of December 2008, the National Association of Realtors reported that about 3.7 million vacant homes were listed for sale compared to 2.1 million in 2006. A large inventory of homes is a great advantage for first-time home buyers looking for a good deal on the right property. The U.S. Bureau of the Census reports that first-time home buyers usually buy smaller, older, and less-expensive homes. Therefore, finding the right home for these buyers usually tends to be a challenge, but that may not be the case anymore. At the moment, buyers have many options to choose from.
The influx of foreclosures in the marketplace has also helped drive house prices down. In fact, according to the S&P/Case-Shiller Home Price Indices, home prices have declined about 25 percent from their the highest point levels in mid-2006. This is great news for first-time home buyers because for example, a home that would’ve cost them $200,000 in 2006 can now be purchased for the much lower price of $150,000. Additionally, sellers are now desperate to sell and are willing to negotiate with buyers.
In addition, to low home prices and a large supply of homes, first-time home buyers can also take advantage of low interest rates, which have recently dropped to historic lows. With the Federal Reserve’s recent decision to print $1.2 trillion and push it into the economy, the national average rate on a 30 year, fixed-rate mortgage has fallen below 5 percent. This is the lowest rates have been in about 30 years. While it is difficult to predict when interest rates will change, many believe there has never been a better time to buy.
First-Time Home buyer Tax Credit
The government has taken some steps to help stimulate the economy and bring home buyers back into the market (Timiraos A4). In 2008, Congress approved a $7,500 tax credit for first-time home buyers, unfortunately that was not enough to help the housing sector since buyers were seeing it as just another loan given that the credit would have to be repaid. However, early this year the $7,500 tax credit was repealed and in its place is now an $8,000 tax credit that does not have to be repaid.
Here’s how the $8,000 tax credit works, according to the federal housing tax credit website:
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
Only available to first-time home buyers who have not owned a principal residence during the three-year period prior to the purchase.
All U.S. citizens who file taxes are eligible to participate in the program.
The tax credit does not have to be repaid, unless the home is sold within three years after the purchase.
Applies to all types of principal homes bought on or after January 1, 2009 and before December 1, 2009.
Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
Federal Housing Administration (FHA)
Economists believe that the tax credit in conjunction with low prices, large inventories, and low interest rates could be enough to lure first-time home buyers back into the housing market. Nonetheless, first-time home buyers typically have the most difficult time saving enough money for a down payment (Hoak). A few no-down-payment loans may perhaps still be available, but they will have a lot more restrictions than before and will require an excellent credit rating. Yet, there is hope for first-time home buyers with less than perfect credit who are unable to save for a 20 percent down payment.
Lately, many borrowers who aren’t qualifying for conventional loans are considering FHA backed mortgages. Though the FHA does not lend money to borrowers, it does insure loans made by private lenders against defaults; therefore, lenders will be more willing to make loans to riskier borrowers. FHA insured loans have competitive interest rates, are easier to qualify for, and only require a down payment of about 3.5 percent.
FHA backed loans are a great alternative for first-time home buyers, however buyers must keep in mind that along with this come some caveats. Normally, FHA borrowers pay an up-front mortgage insurance premium equal to 1.5 percent of the loan amount and an annual premium (divided into twelve monthly payments) of 0.50 percent of the average outstanding loan balance if the life of the loan is greater than 15 years; 0.25 percent if the life of the loan is less than 15 years. However, because of the current state of the economy and recent changes enacted by the government, I would advise that first-time home buyers verify mortgage insurance rates and restrictions and limitations of an FHA loan with their lenders.
Home Buying Assistance
For those borrowers who are unable to come up with the 3.5 percent down payment, there are other avenues of assistance they should take into consideration. Most states have housing-financing agencies that offer first-time home buyers low-interest mortgage loans or guarantee loans made by lenders. Unfortunately, because of the credit crunch, several states such as California, Texas and Wisconsin, have had to suspend their mortgage programs (Timiraos C1). Nonetheless, some of these agencies, such as the Texas Department of Housing and Community Affairs, have opted to restructure their programs and instead of financing or guaranteeing the loans, are considering making down-payment assistance available to first-time home buyers (Okada). There are many assistance programs that are offered at the federal, state, and local levels to first-time home buyers who are in need. It is important for buyers to do due diligence and review all their options when buying a home.
Conclusion
While the subprime mortgage meltdown has been devastating for some, others are finding that this is an excellent time to make the leap into homeownership. First-time home buyers who have excellent credit, cash reserves, and a secure income are in the best position to make a long-term investment in homeownership. In fact, because of favorable conditions in the housing market, we may start seeing a turnaround. According to the National Association of Realtors, sales of previously owned homes, “which make up about 85 percent to 90 percent of the total market, rose in February after a sharp decline in January. Sales jumped a seasonally adjusted 5.1 percent, the biggest one-month gain since late 2003, to a 4.7 million annual sales pace. Condominium sales were particularly strong, while sales of single-family homes rose 4.4%” (Evans, Lahart A2). First-time home buyers accounted for half of last month’s home sales.
Nevertheless, even though lending restrictions have become stricter in the last year, some first-time home buyers will find that there are still options available to them even if their financial situation may be less than perfect. As with any investment, buyers should be aware of their options and the risks involved, and ensure that this is the proper investment for them at this point in time.
Lazo, Alejandro. “Prices Fall, But Home Sales Hit 12-Year Low.” The Washington Post 26 February 2009: D01.
Merle, Renae. “Recession Propels Skid In Housing Sales, Prices; Tight Credit Locks Many Out of Buyer’s Market.” The Washington Post 24 December 2008: A01.
Okada, Bryon. “Texas Program for First-Time Home Buyers Suspended.” Star-Telegram 18 March 2009 <>.
Pilon, Mary. “For Some, It’s Finally Time To Dive Into Housing Market.” The Wall Street Journal 11 February 2009: D1.
Timiraos, Nick. “State Housing Agencies Get Caught in Credit Crunch.” The Wall Street Journal 11 March 2009: C1.
Timiraos, Nick. “U.S. News: Real-Estate Sector Cheers Tax Credit.” The Wall Street Journal 9 February 2009: A4.
Samuelson, Robert J. “Wrong Turn on Housing.” The Washington Post 2 March 2009: A17.
Buying a house for the first time is always nerve-racking, but trying to do it in an unstable economy can be even more harrowing for buyers. During the housing boom of the late 1990’s and early 2000’s, first-time home buyers had little to worry about. Even with bad credit history, loans were easily obtained, usually with no down payment, little to no upfront costs, and few income verifications. Credit was effortlessly being extended to high risk borrowers who wouldn’t have otherwise been able to afford a home.
At the end of December 2008, the National Association of Realtors reported that about 3.7 million vacant homes were listed for sale compared to 2.1 million in 2006. A large inventory of homes is a great advantage for first-time home buyers looking for a good deal on the right property. The U.S. Bureau of the Census reports that first-time home buyers usually buy smaller, older, and less-expensive homes. Therefore, finding the right home for these buyers usually tends to be a challenge, but that may not be the case anymore. At the moment, buyers have many options to choose from.
While the subprime mortgage meltdown has been devastating for some, others are finding that this is an excellent time to make the leap into homeownership. First-time home buyers who have excellent credit, cash reserves, and a secure income are in the best position to make a long-term investment in homeownership. In fact, because of favorable conditions in the housing market, we may start seeing a turnaround. According to the National Association of Realtors, sales of previously owned homes, “which make up about 85 percent to 90 percent of the total market, rose in February after a sharp decline in January. Sales jumped a seasonally adjusted 5.1 percent, the biggest one-month gain since late 2003, to a 4.7 million annual sales pace. Condominium sales were particularly strong, while sales of single-family homes rose 4.4%” (Evans, Lahart A2). First-time home buyers accounted for half of last month’s home sales. 
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