First-time buyers losing out as home sales rise

• First-time buyers%27 share of existing-home sales was 28%25 in May%2C down from 34%25 in 2012
• They play a critical role in housing recovery%2C allowing current owners to move up
• Competition from investors%2C tight credit%2C personal finances are obstacles

U.S. home prices have risen for 14 straight months, but one set of buyers has been increasingly on the sidelines: first-time home buyers.

In May, first-time buyers accounted for 28% of existing-home purchases, down from 34% a year before and 36% two years ago, according to the National Association of Realtors.

The declining share of first timers means that many have missed out on low interest rates — which recently moved up from near-record lows — and home prices that have risen sharply from their bottom.

"The people buying homes today … are participating in home price growth. Younger people, they are being left out," says Lawrence Yun, chief economist for NAR. "It remains to be seen when the first-time buyer can return."

Home prices were up 12% in April year over year, market researcher CoreLogic says. Last week, average rates for the 30-year-fixed rate loan popped well above 4% for the first time since late 2011, Freddie Mac said. They're likely to stay there for the rest of the year before moving higher in 2014, some economists say.

Over the long term, four of 10 home buyers are first-timers, a 2012 NAR report says. They're critical to a housing recovery because they help existing-home owners sell and move up to larger or more expensive homes. But several factors are reducing their presence in the market, including:

• Competition. Cash buyers accounted for 33% of existing home sales in May. Investors, who are often all-cash buyers, accounted for 18% of purchases, NAR says.

Cash buyers are tough competitors, especially in markets with limited inventory and for first-time buyers who often use low down-payment loans to finance purchases.

The first-time buyer "is being squeezed out of the market a lot," says Zillow economist Svenja Gudell.

There are also more repeat buyers in the market given that higher home prices have enabled more people to sell homes and buy others, says Glenn Kelman, CEO of brokerage Redfin.

• Tight credit. Home loans are harder to get than before the housing bust, and that's true for first-time buyers, too.

Almost half of first-timers get low down-payment loans through the Federal Housing Administration, NAR data show.

New FHA home loans in the last three months of 2012 went to borrowers with an average credit score of 696 vs. less than 660 in 2007 and 2008, FHA data shows. Credit scores, which run up to 850, for conventional loans have also risen.

• Recession. It hit the 25- to 34-year-old group with higher unemployment than for adults overall, says Jed Kolko, Trulia economist. Young people have made a strong recovery, but it takes years of steady employment to save a down payment and build strong credit, he says. High levels of student debt will also delay homeownership, Kolko says.

Home prices are still 26% off their 2006 peak, and current interest rates are low by historical standards. But the increases in both the past year make a big difference in costs.

In May, the median value of the bottom one-third of homes in San Francisco was $287,500, Zillow data show. With today's 4.4% interest rate and a 20% down payment, the mortgage payment runs $1,154 — $313 more than it would've been at last year's prices and rates, Zillow data shows.

"You're getting a double whammy with higher prices and rates," says Ashley Krause, 31, of Boston.

The hospital pharmacist is attempting to buy with a down payment of 5% or less. She's been shopping for her first home for six months. She lost two bids to other shoppers.

More first-time buyers may also have to go back to "starter" homes, Gudell says. In recent years, low home prices and low rates enabled some to buy bigger and nicer first homes than in the past, she says.