First-time buyers are less likely than homeowners to be holding out for lower mortgage rates. But they hold a host of other priorities and concerns, according to an Intel analysis of buyer behavior.

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If affordability weren’t such an obstacle these days, first-time homebuyers might be at the front of the line to re-energize a depressed housing market.

Without an existing low-interest home loan to cling to, high-income renters report being less hamstrung by high mortgage rates than existing homeowners are. As such, this group of potential buyers could either end up on the leading edge of an eventual housing recovery — or be left out of the mix altogether.

With that kind of impact hanging in the balance, Intel wanted to know: What do these young people want in a home? What is it, perhaps, that they’re afraid of right now? And what would it take for them to get off the sidelines?

The team at John Burns Research and Consulting is exploring all of these questions on a regular basis with potential homebuyers. They shared the results of their September survey of 1,364 homeowners and renters with Intel for this piece.

Looming large for young buyers, of course, are today’s high mortgage rates, which have pushed many homes that were already overpriced for many young buyers completely out of reach.

“They’ve never ever lived outside of a period where they had to ever see above 5 percent rates,” John Burns Senior Research Analyst Maegan Sherlock told Intel. “I think it’s sticker shock, to some degree, and then they’re constantly blasted with this [story of], ‘Rates are as high as they’ve ever been.’”

But Sherlock points out that the factors that make younger consumers reluctant to buy a home right now go well beyond mortgage rates. These other factors have broad implications for the types of homes that young buyers are likely to target, and when the industry can expect them to leave the sidelines.

Holding out hope

All homebuyers are affected by higher mortgage rates, and most say they are holding out for rates to drop before they re-enter the home market.

But if the John Burns survey is any indication, this weighs more heavily on homeowners than renters, who are not held back by a low-rate loan on their current residence.

Approximately 37 percent of renters who were surveyed said they would not accept a rate above 5 percent, with another 15 percent of renters saying they were “unsure” what rate they would accept. 

That’s compared to 58 percent of homeowners who said they would not accept a rate above 5 percent. Only 6 percent of homeowners reported they were unsure. 

Credit: John Burns Research and Consulting

From this and broader economic data, it’s apparent that most homeowners with a mortgage are sitting on extremely low rates they locked in during the pandemic, and feel they can be more selective about the kind of rate they would accept.

Renters with high incomes, who tend to be younger, are more flexible, and could be moved to action without rates dropping quite as far.

This would seem to position the younger, first-time buyer near the front of the line once mortgage rates ease, or once consumer attitudes toward higher rates shift. 

But young buyers have problems of their own, and some of them weigh heavily on whether they are willing or able to entertain a home purchase, the survey found.

Fear and debt

For most groups, budgets are tightening and financial worries are on the rise — unless you’re an older person without children to look out for.

Roughly 1 in 5 older singles and couples without children in the home reported being better off financially than they were a year ago, a share that slightly improved from when John Burns last surveyed consumers in March.

But for young singles and couples — a group more likely to include potential first-time buyers — the financial picture has worsened as inflation has eaten into household budgets.

In March, nearly half of young singles and couples said they were better off financially than a year ago. That share was slashed nearly in half by September, with only 26 percent saying they were better off. Among young families with children, the share that reported being better off than a year ago dropped from 35 percent in March to 26 percent in September.

Credit: John Burns Research and Consulting

This deteriorating financial sentiment among young people extended to pessimism about the future as well, the survey found. And Sherlock has a theory about part of the reason why.

“In March, 45 percent said they had an optimistic financial outlook, and that dipped down to 37 percent for the next 12 months,” Sherlock said. “So assuming some of them have the student-loan payments resuming, I think that kind of reflects thoughts for the future.”

Among all age groups, nearly 1 in 5 consumers in a previous survey said they had saved money on student loan payments due to federal forbearance programs.

Now, those programs are at an end — and younger homebuyers are likely to be most affected, Sherlock said.

“Generally speaking, younger households are the ones who are hanging onto this student loan debt,” Sherlock told Intel. “And now, with the resumption of loan payments, that’s going to be a factor for them going forward.”

But regardless of the reason for the worsening financial sentiment, the more strained young households are financially, the less money they’ll be able to set aside for housing.

And when asked what their chief concerns are related to the housing market, young buyers say it’s not just that monthly payment they’re struggling to afford. It’s the staggering up-front costs as well.

Avoiding up-front costs

When asked what’s holding them back from purchasing a home, renters don’t list today’s high mortgage rates first, or even second.

The most-cited factor, according to 58 percent of renters surveyed by John Burns, is that it takes time to save enough money up front for a down payment.

The second-most cited factor is expecting home prices to decline at 44 percent, followed by waiting for mortgage rates to decline at 42 percent, and waiting for a pay raise at 38 percent.

These top factors are all tied to affordability. But the extent to which renters feel the burden of up-front costs is clear. And it has surprisingly broad implications for the types of housing opportunities first-time buyers are pursuing in this market, Sherlock told Intel.

“The younger cohort — the singles and couples — were really into new construction, as opposed to resale,” she said. “In a market where they are considering potentially both [new construction and resale], they didn’t want the up-front maintenance costs of not knowing whether there’s a leaky roof somewhere, or whether there’s a repair that needs to be made or an outdated kitchen that needs to be dealt with. They were really focused on ‘no surprise costs.’”

In fact, more than half of young singles and couples said they believed newly built homes were a better value than resale homes, the highest share of any group surveyed. Older groups were more split on the question, with some saying they valued the craftsmanship and lot sizes that tend to come with existing homes.

Credit: John Burns Research and Consulting

Falling price points for new construction and aggressive rate buydowns may be informing this preference for new homes among younger buyers. But the draw of fewer early home-maintenance projects is appealing to younger groups as well, Sherlock said.

“I know we see a lot of fixer-upper shows on TV, and that’s all romanticized and nice,” Sherlock said. “But the reality of that situation is, it takes forever. You’ve got to find contractors and renovators and all that fun stuff. And it’s very expensive. 

“So I think the one-stop-shopping appeal of new construction is big for especially a first-time homebuyer [or] prospective buyer.”

Ultimately, a wave of first-time buyers, unencumbered by an existing home loan with an ultra-low rate, stands ready to enter the market. But their finances — from wages to stress on their budgets from consumer-price inflation and student-loan payments — may determine whether they help lead a housing-transaction recovery, or remain sidelined for longer. 

And their involvement may well end up favoring homebuilders more than businesses that specialize in existing-home sales.

Email Daniel Houston

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