It’s no mystery that first-time home buyers are struggling to find houses to purchase in 2021. This has been one of the biggest real estate headlines over the past year or so.
Despite minor variations, the overall theme is generally the same. First-time buyers enter the market excited to make a purchase, only to find they’re being outbid by others with bigger down payments and (often) all-cash offers. Add record-low inventory levels into the mix, and you have a challenging market for first-time home buyers.
That’s the reality of the current real estate scene across the U.S., and it’s unlikely to change anytime soon.
3 Reasons Why First-Time Buyers Are Struggling
There are many reasons why first-time buyers are having a hard time in 2021. Here, we will focus on three of the biggest reasons — rising prices, inventory shortages, and cash offers.
1. Home prices have risen significantly in most U.S. cities.
Rapidly rising home prices are one reason why first-time buyers continue to struggle in 2021. The pandemic and economic slowdown that started in the spring of 2020 did little to hamper the U.S. housing market. On the contrary, it gave the real estate market a big push by shining a light on the benefits of home ownership and relocation.
After slowing down in April of last year, home sales raced ahead at a breakneck pace. This led to a steady increase in prices. In many cities across the U.S., house values rose well into the double digits over the past year or so. That’s made things challenging for first-time buyers, who don’t have profits from a previous home sale to put toward their next one.
Prices will probably continue to climb in most U.S. cities for the foreseeable future.
According to the real estate data company Zillow, the median home value in the United States rose by 13.2% over the past year or so. (As reported in early June 2021.) Looking forward, the company predicts that prices will rise by double digits over the next 12 months as well.
These gains far exceed historical averages. Looking back 30 or 40 years, home prices in the U.S. rose by around 5% annually. But over the past year or so, they’ve been rising at a much faster pace. Rising house values continue to outpace income growth in the U.S.
You don’t have to be an economist to connect the dots here. If home prices continue to climb, as they are expected to do, more and more first-time buyers will get priced out of the real estate market.
2. There’s a serious shortage of starter homes in the U.S.
As we explained in a previous report, there is a chronic and ongoing shortage of entry-level starter homes in the United States.
There is no standard definition of a “starter home.” But in this context, we are referring to properties with less than 1,400 square feet. These are smaller houses that fall within the lower end of the pricing spectrum — the kinds of homes first-time buyers often seek out.
According to a May 2021 report from researchers at Freddie Mac, home builders are producing far fewer entry-level houses today than in previous decades. In the early 80s, for example, homes with less than 1,400 square feet accounted for around 40% of total construction activity. By 2020, that percentage had dropped to around 7%.
But it’s not just starter homes that are in short supply these days. The ongoing inventory shortage affects buyers up and down the pricing spectrum. The residential construction industry has been under-building for the last 15 years or so. This accounts for the current situation we find ourselves in.
Additionally, many homeowners have been reluctant to sell due to the pandemic and concerns about finding another house to buy. According to a June 2021 report from Realtor.com, the total number of active real estate listings in the U.S. dropped by more than 50% over the past year or so. In other words, the real estate market has shrunk by half over the past 12 months (when measured by homes for sale).
An ongoing shortage of inventory is one of the top-three problems first-time home buyers face in 2021. Supply constraints make it harder for some buyers to find a suitable house that falls within their budget. And when you combine this with the other two issues featured in this report, you can see how these challenges add up.
3. A lot of competing buyers are making all-cash offers.
As they say in the real estate world, cash is king. And there appears to be plenty of cash going around in 2021.
Over the past year or so, we’ve seen an increase in the number of all-cash home purchases across the U.S. This too can make things harder for first-time buyers, most of whom use a mortgage loan to finance their purchase.
According to a recent report from the National Association of Realtors, all-cash real estate deals have increased significantly over the past year. In April of 2021, about 25% of home sales in the U.S. were all-cash deals, compared to 15% a year earlier.
In a competitive real estate market, it’s hard for a mortgage-backed purchase offer to compete with an all-cash offer. After all, a lot can go wrong when a mortgage loan is being used. There is more uncertainty involved. Homeowners know this. So they are typically more inclined to accept a cash offer, over one that’s tied to a mortgage loan.
This too puts first-time buyers at a disadvantage, since most of them use mortgage loans when making a purchase.