Three Biggest Challenges for First-Time Home Buyers in 2020

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Highlights from this article:

  • First-time home buyers in 2020 could face several obstacles.
  • Inventory shortages will be the biggest challenge for many buyers.
  • A lack of affordable housing is another key problem in many cities.
  • Some first-time buyers have too much debt to qualify for financing.

Biggest Challenges for First-Time Home Buyers in 2020

First-time home buyers planning to buy a home in 2020 face a unique set of challenges. There’s a shortage of inventory for one thing, especially within the “starter home” price range. Affordability has declined. And many would-be buyers will be turned down for mortgage loans due to their existing debt loads.

Of course, it’s not all doom and gloom. Thirty-year mortgage rates are still hovering well below 4%, on average. The nation’s job market remains strong. And some real estate markets across the country are beginning to favor buyers more so than in the past.

But there are still some clear challenges for first-time home buyers planning to buy in 2020. To ignore them would be a disservice.

With that in mind, here’s an in-depth look at what we feel are the biggest challenges first-time buyers will face in 2020.

Inventory: Biggest Problem in Many Housing Markets

In many housing markets, inventory shortages have been the biggest challenge for first-time home buyers in 2019. And it will continue to be an issue in 2020 as well.

The short version: In many U.S. cities, there just aren’t enough homes on the market to meet the demand from buyers.

A September 2019 report published by RE/MAX showed that housing inventory nationwide dropped (again) in August. In fact, August’s inventory decline was the biggest drop in over a year. The number of homes listed for sale nationwide dropped 5.5% in August 2019, compared to the same month a year earlier.

According to company CEO Adam Contos:

“RE/MAX reports buyer demand outpaced homes listed for sale in August, causing the largest inventory decline in 13 months. Overall, the number of homes for sale fell 5.5% from 2018’s level and 1.5% from the previous month.”

The company reported a 2.8-month supply of properties for sale during the summer of 2019. That’s well below what is considered to be a “balanced” real estate market — if such a thing even exists anymore.

This trend will present unique challenges for first-time home buyers in 2020, as it has for the past couple of years.

The supply of lower-priced starter homes is especially tight right now. Robert Dietz, chief economist of the National Association of Home Builders, recently told CNBC:

“It’s not just the overall supply of new construction that’s gone down, but the supply of starter homes, so it’s the affordability challenge at the entry level that’s been a particular challenge.”

Our advice: If you’re in one of those markets where inventory is low, you might want to expand your housing search to include surrounding areas. Be flexible and open-minded when it comes to the features you want in a home. You might even consider renting for a while, until inventory conditions improve.

Affordability Challenges for First-Time Buyers

A lack of affordable housing options is another potential obstacle for first-time home buyers in 2020. This is especially true in those real estate markets where prices have risen significantly over the past few years. That includes cities like Denver, Seattle, and much of California.

The Northern Virginia real estate market could also become less affordable in 2020, due to the Amazon-fueled buying frenzy occurring in that area.

In these and other real estate markets, buyers who earn an average income might discover they can’t afford to buy a median-priced property. The problem is compounded for first-time buyers, since they lack the proceeds from a previous home sale.

According to the “2019 U.S. Home Affordability Report” published by ATTOM Data Solutions in September, 74% of the nation’s housing markets remain unaffordable for average wage earners. In Q3 2019, median home values were found to be unaffordable for average wage earners in 371 of the 498 counties analyzed in this study.

But like all of the first-time home buyer challenges on this list, the affordability issue varies by region. Some cities are still fairly affordable for first-time buyers, and that will carry into 2020 as well.

For example, the ATTOM Data Solutions report singled out a handful of housing markets where homes are still relatively affordable for first-time buyers earning an average income for the area:

“The 127 counties (26 percent of the 498 counties analyzed in the report) where a median-priced home in the third quarter of 2019 was still affordable for average wage earners included Harris County (Houston), TX; Wayne County (Detroit), MI; Philadelphia County, PA; Cuyahoga County (Cleveland), OH; and Allegheny County (Pittsburgh), PA.”

Along those same lines, an October 2019 report from Trulia found that the following metro areas had the highest percentage of affordable neighborhoods:

  • Pittsburgh, Pennsylvania
  • Columbus, Ohio
  • St. Louis, Missouri
  • Kansas City, Missouri
  • Indianapolis, Indiana

So there are still plenty of housing markets with affordable home prices for first-time buyers. (The Trulia report called them “pockets” of affordability.) But with house values rising nationwide, a lack of affordable housing options will continue to be a big challenge for first-time buyers in 2020.

Our advice: Start by researching home prices in the area where you plan to buy, to find out where you stand. Look at surrounding areas as well. Consider using a down payment gift to reduce your upfront, out-of-pocket expense. Start saving up for your down payment, closing costs and other expenses.

Too Much Debt: Top Reason for Mortgage Denial

In 2020, many first-time home buyers will find that they have too much debt to qualify for a mortgage loan. In fact, excess debt is currently the number-one reason for mortgage rejection among home buyers in the U.S. And it’s on the rise.

An August 2019 report from the Federal Reserve Bank of New York’s Center for Microeconomic Data showed that total household debt in the U.S. increased by $192 billion (1.4%) to $13.86 trillion during the second quarter of 2019.

Mortgage loan balances (the largest component of household debt in the U.S.) rose by $162 billion in the second quarter to reach $9.4 trillion. That’s even higher than the peak of $9.3 trillion reached in 2008, at the start of the nationwide housing collapse.

The chart below, created by the Federal Reserve Bank of New York, shows how household debt levels in the U.S. have reached their highest point ever. It also shows that housing-related debt (namely mortgage loans) makes up the bulk of that balance.

Chart: U.S. Household Debt. | Source: FRBNY Credit Panel / Equifax

So, why is this a potential problem for first-time home buyers in 2020?

For some borrowers, this might not be an issue at all. People who have an average or below-average debt load probably wouldn’t have any trouble qualifying for a mortgage loan. But for those first-time home buyers who carry a lot of debt, mortgage financing might be out of reach.

To be clear, mortgage denials have actually declined in recent years. And that’s good news for first-time home buyers. But they do still occur. A recent analysis by LendingTree found that “nearly 1 in 10 borrowers get denied for mortgages.”

The number-one reason for home loan rejection? Debt.

The LendingTree study found that the leading reason for mortgage denial was the borrower’s debt-to-income ratio. Debt-related rejections accounted for 33% of all loan denials last year.

This is not as big of an issue for first-time home buyers as the inventory and affordability challenges mentioned earlier. But it is something to be aware of, especially as household debt levels in the U.S. continue to climb.