Housing Isn't a Buyer's Market for Many First-Timers

A Gorilla Capital realty for sale sign is displayed outside of a house in Phoenix, Arizona on Aug. 14, 2011. (Joshua Lott/Bloomberg/Getty Images)

 

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Alex Dorado thought that buying his first home was going to be easy.

"I said, 'This is a recession. No one is looking at houses,' " the cellphone salesman says.

Dorado, 25, found his first love in February, a 1,200-square-footer in this Sacramento-area suburb. Before he put his offer in, he took his parents to see "where I was going to live," only to discover the house was already sold.

He lost more than a dozen other bids on homes, often to cash-packing investors, before he landed a $134,000 fixer-upper in May with a low-down-payment Federal Housing Administration (FHA) loan. Now, he's upgrading the home, which sits on a blue-collar street with dented cars parked in two nearby driveways.

As the nation's housing market shows signs of bottoming after years of declining prices, many first-time buyers such as Dorado are getting a rude awakening. Instead of having their pick of homes to buy in some markets, they're losing houses to cash buyers and bidders with bigger down payments, or they're facing bidding wars spurred by shrinking numbers of homes for sale.

The competition can be most evident for lower-price homes in markets hard-hit by foreclosure, such as Phoenix, Miami and parts of Southern California, or those with relatively strong economies, such as Washington, D.C., and San Francisco, Realtors say.

Joshua Lott/Bloomberg/Getty Images

A Gorilla Capital realty for sale sign is... View Full Size

Joshua Lott/Bloomberg/Getty Images

A Gorilla Capital realty for sale sign is displayed outside of a house in Phoenix, Arizona on Aug. 14, 2011.

First-time buyers who use FHA loans might be in for the toughest time. They're frequently low-down-payment bidders. FHA loans might also require sellers to do more home repairs than do other loans, such as fixing chipped paint on older homes, Realtors and lenders say. If sellers receive multiple offers, they may avoid FHA offers.

"FHA buyers are getting pushed to the bottom of the pile," says Brian Cross, a Phoenix-area Realtor for Keller Williams Realty. "It's much different than a year ago."

Even first-time buyers with conventional loans and 20% down payments have been surprised by the competition.

"I thought it was a buyer's market ripe for the picking," says Jason Leggett, 25, an aerospace engineer at John Hopkins University Applied Physics Laboratory near Washington, D.C. He recently bought his first home, beating four other bidders.

Before that, he'd lost out on six offers. He probably won his $459,000 colonial because he had guaranteed financing, Leggett says.

Rates are low, but getting loans difficult

Nationwide, 35% of existing single-family home buyers in April were first-timers, according to the National Association of Realtors. In healthier times, first timers account for 40% to 45% of the market, says NAR chief economist Lawrence Yun. Tight credit and a still-shaky economy have kept many first-timers out of the housing market, he says.

But low interest rates are luring more buyers, as are home prices that are down 35% from their 2006 peak.

Dorado decided to buy after discovering that it would cost less than renting. One-bedroom apartments in his area ran about $950 a month. His mortgage, after putting about 3.5% down with an FHA loan and securing a 3.875% interest rate, runs $925 a month. That includes everything but utilities.

"And I have three bedrooms and a pool," says Dorado.

It now costs more to rent than to own a home in 98 of the top 100 U.S. metropolitan areas, says real estate website Trulia, which tracks rents and home prices. In some of those markets, however, the inventory of homes for sale has shrunk.