It’s no mystery that first-time homebuyers are struggling to find homes to buy in 2021. This has been one of the biggest real estate headlines over the past year.
Despite minor variations, the overall theme is generally the same. First-time buyers enter the market excited to make a purchase, only to find that they are being outbid by others with larger down payments and (often) all-cash offers. Add record levels of inventory into the mix, and you’ve got a tough market for first-time homebuyers.
This is the reality of the current US real estate scene, and it’s unlikely to change anytime soon.
3 reasons why first-time buyers have trouble
There are many reasons that first-time buyers are struggling in 2021. Here, we’ll focus on three of the main reasons – rising prices, stock shortages, and cash offers.
1. Home prices have increased significantly in most US cities.
The rapid rise in home prices is one of the reasons first-time buyers continue to struggle in 2021. The pandemic and economic downturn that began in the spring of 2020 has done little to hamper the US real estate market. On the contrary, it has given a boost to the real estate market by highlighting the benefits of homeownership and relocation.
After slowing down in April of last year, home sales accelerated at a breakneck pace. This has resulted in a constant increase in prices. In many cities across the United States, home values ââhave risen well in the double digits over the past year. This has made things difficult for first-time buyers, who do not benefit from a previous sale of house to put towards their next.
Prices will likely continue to climb in most US cities for the foreseeable future.
According to real estate data company Zillow, the median home value in the United States has increased 13.2% in the past year. (As reported in early June 2021.) Looking ahead, the company predicts that prices will also increase by double digits over the next 12 months.
These gains far exceed historical averages. With 30 or 40 years in the past, home prices in the United States have increased by about 5% per year. But over the past year, they’ve grown at a much faster rate. Rising home values ââcontinue to outpace income growth in the United States
You don’t have to be an economist to connect the dots here. If house prices continue to rise, as they should, more and more first-time buyers will be excluded from the real estate market.
2. There is a severe shortage of starter homes in the United States.
As we explained in a previous report, there is a chronic and continuing shortage of entry-level startup homes in the United States.
There is no standard definition of a “home of departure”. But in this context, we are talking about properties of less than 14,000 square feet. These are the smaller homes that are on the lower end of the price scale – the types of homes that first-time buyers often look for.
According to a May 2021 report by researchers at Freddie Mac, home builders are producing far fewer entry-level homes today than in previous decades. In the early 1980s, for example, homes under 14,000 square feet accounted for about 40% of total construction activity. By 2020, that percentage had fallen to around 7%.
But it’s not just starting houses that are in short supply these days. The continuing shortage of inventory is affecting buyers up and down the price spectrum. The residential construction industry has been under construction for the past fifteen years. This explains the current situation in which we find ourselves.
Additionally, many homeowners have been hesitant to sell due to the pandemic and concerns about finding another home to buy. According to a June 2021 report from Realtor.com, the total number of active real estate listings in the United States has fallen by more than 50% in the past year. In other words, the real estate market has halved over the past 12 months (as measured by homes for sale).
A continuing shortage of inventory is one of the top three issues first-time homebuyers face in 2021. Supply constraints make it harder for some buyers to find a suitable home on their budget. And when you combine that with the other two questions presented in this report, you can see how these challenges add up.
3. Many competing buyers make cash offers.
As they say in the real estate world, money is king. And there seems to be a lot of money in circulation in 2021.
Over the past year or so, we’ve seen an increase in the number of all-cash home purchases in the United States. It can also make things more difficult for first-time buyers, most of whom use a mortgage to finance their purchase.
According to a recent report by the National Association of Realtors, real estate cash transactions have increased dramatically over the past year. In April 2021, about 25% of home sales in the United States were all-cash transactions, up from 15% a year earlier.
Related: Many Buyers Pay Too Much In 2021
In a competitive real estate market, it is difficult for a mortgage-backed offer to purchase to compete with an all-cash offer. After all, a lot of things can go wrong when a mortgage is used. There is more uncertainty involved. The owners know it. They are therefore generally more inclined to accept a cash offer rather than an offer linked to a mortgage loan.
It also puts first-time buyers at a disadvantage, as most of them use mortgages when making a purchase.