Is there hope for first-time buyers post-COVID-19? Part One: The case against

by Clayton Jarvis26 May 2020

As Google searches for “the new normal” grow in frequency, a stark new reality is facing America’s prospective first-time buyers, one in which widespread labor disruption, rising prices and limited funding options are pushing them further and further to the margins, where, for many, the dream of homeownership slowly dies.

With the country and its housing markets opening up, Mortgage Professional America thought now would be an opportune time to take a thorough look at the barriers standing between Americans and their first homes.

Job losses and depleted savings

The most immediate threat to first-time buyers is the current state of the job market. The Department of Labor reported last week that almost 39 million Americans had lost their jobs in the previous nine weeks, pushing the unemployment rate to 14.7 percent.

While the beating dished out by COVID-19 has bruised every inch of the economy, the leisure, hospitality and restaurant/bar sectors were particularly hard hit. (Over 28 percent of the leisure/hospitality workforce was out of work by the end of March.) More than 80% of the first wave of job losses occurred in the economy’s lower paying sectors, where most first-timers find employment. With major employers like Hertz having to file for bankruptcy, it’s a safe bet that thousands of independent restaurants, bars and cafes will be similarly challenged to survive, as will countless  other small businesses – salons, specialty shops – that rely on minimum-wage labor.

An inability to go back to work will inevitably result in many potential first-timers needing to dip into the cash they’ve stashed away for down payments. That’s precisely what Dr. Franceska Ortegren found while crunching survey results for a report she wrote in April for Clever.

“We found that people who are taking additional debt to cover additional expenses as a result of COVID-19 have taken out more in April than they were reporting in March,” Ortegren says. The survey also found that 21 percent of respondents felt the level of unemployment assistance they were receiving is not enough to cover their expenses, another blow to down payment savings.

“People aren’t really sure where they’re going to be financially in the future,” she says. “I think that people think that this is going to be a long-term economic downturn. Doing something like purchasing a house might not be the smartest idea if you don’t feel comfortable with your job security or income stability over the next two years.”

Home prices and historically low supply

As dark as they’ve been, the last two months of doom and gloom have failed to obscure just how robust the U.S. housing market was before COVID-19 stormed in. But the market’s one glaring weakness – a lack of supply – has been exacerbated by the past several weeks of halted construction.

2020 was already projected to be tight in terms of supply. Realtor.com predicted in December that supply could hit historically low levels this year. Realtor.com senior economist said, "2020 will prove to be the most challenging year for buyers, not because of what they can afford, but rather what they can find."

According to TransUnion, as many as 9.2 million homebuyers will enter the market in the next few years. In addition to competing with each other and potentially driving up prices beyond their budget limits, these buyers will also need to confront the fact that homeowners are staying in their homes longer (approximately 13 years), a trend driven by a swelling Baby Boomer population that plans to age in place.

That lack of supply can really have only one result: higher prices, especially once buyers come back into the market in full force. There could be thousands of buyers who had originally planned on buying a more spacious or newer property who will be forced to downsize their expectations and purchase a property in the starter home range. If this scenario plays out, expect the median price of a starter home in the U.S., $233,800 as of Q4 2019, to balloon beyond what many first-time buyers can afford. 

Limited credit options

Even if first-time buyers can find properties they think they can afford, more restrictive lending guidelines and the possibility of having fewer down payment assistance programs to turn to are sure to erect immovable roadblocks for some borrowers.

“A lot of lenders, because there’s so much economic uncertainty, have tightened their lending standards,” says First American Financial Corporation’s Odeta Kushi, “so you need a 700 FICO score and a 20 percent down payment to buy that first home. Unfortunately, a lot of first-time buyers aren’t bringing equity to that first home.”

RCN Capital’s Justin Parker sees the same factors, especially more conservative loan terms, impacting first-time buyers who might approach the private lending space.

“We will certainly see some additional restraints in regard to lending practices,” he says, “and in some cases it will not be permitted at all.” But Parker stresses that the market for investors and first-time buyers is far too large and lucrative for it to ever become too challenging.

In a May 10 post on mortgageblog.com, Arcus Lending CEO Shashank Shekhar looked at the country’s shrinking Mortgage Credit Availability Index, which fell in April to its lowest point since December 2014. Shekhar said lenders have shied away from loan programs that could be perceived as “remotely risky”, including two that will directly limit first-time buyer options: loans to borrowers with low credit scores and non-QM loans that help borrowers qualify with documents other than W2s and tax returns.

Such borrowers, faced with financing challenges at the state level, may hope to turn to a national down payment assistance program to get them into a home. But recent work on the part of the Department of Housing and Urban Development would see national down payment assistance programs like the Chenoa Fund shut down.

Such a move would not only further limit homebuying options; because of the high percentage of people of color who require down payment assistance, reduced access to these programs also carries the risk of exacerbating the country’s growing wealth gap.

“If these down payment assistance programs go away, most of the minorities that are reliant on them will be shut out of the market and will be forced to be a permanent renting underclass,” says CBC Mortgage Agency president Richard Ferguson.

It’s a potentially bleak future for the country’s first-time buyers. But some feel there is hope.

“The good news is that credit standards tend to be fairly cyclical,” Kushi says. “We’ll have the tightening and then when things calm down and the market eases, we’ll start to see those standards open up again.”

On Thursday, MPA will look at the first-time buyer dilemma with something that’s been in short supply lately: optimism.