The New Stepping Stones to Homeownership
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As the economy improves and more households are created, thousands of new families are looking to enter the real estate market and purchase homes. But for many people, serious barriers stand in the way of buying a home.
Because of these obstacles, many of tomorrow’s homeowners are using today’s single-family rentals (SFRs) as stepping stones to homeownership. According to the National Survey of Renters, more than 52 percent of renters—including 60 percent of single-family renters and 44 percent of apartment dwellers—said they anticipate becoming homeowners in the next five years.
Additionally, families with three or more members (64 percent) and children under 13 (69 percent) were more likely to become homeowners than the 43 percent of renters who have no intention of becoming owners.
The findings of the survey suggest that families are using SFRs as a step toward homeownership—whether they’re would-be first-time buyers or families displaced by foreclosure waiting to buy again when they can afford to do so.
Families can stay in these SFRs for several years as they prepare financially for homeownership. As they wait, they can enjoy many of the amenities of owning a home, including large floor plans, strong communities, backyards, security, privacy, and proximity to schools and recreation.
Using a SFR as a step toward buying a home means new buyers are better able to tackle the obstacles that await them in the real estate market:
Big down payments
The average down payment today is 9 percent, according to Lender411.com, an online mortgage marketplace. That average includes the large number of FHA loans that require down payments of only 3.5 percent. Many lenders require much larger down payments.
Rules limit who is allowed to give buyers the funds to make down payments; in most cases, the person giving the gift must be a family member or friend with a verifiable, long-standing relationship. The lender will likely require that the down payment is truly a gift and not a loan that will need to be paid back.
These rules leave many buyers on their own to raise the money required for a down payment on a house. While renting their homes, these future buyers have a chance to save that money.
Tight lending standards
According to Ellie Mae’s latest Origination Insight Report, the median FICO score on closed loans was 746 in the first quarter of 2013. In that same quarter, the loan-to-value ratio—the mortgage amount compared to the appraised value of the property—was 80 percent, and the debt-to-income ratio—how much a borrower owes compared to how much they earn—was 23 percent.
Those are tough standards for many young buyers to meet. While not impossible, they will need to get their finances in order, and renting gives them the breathing room to do that.
Low inventories of homes
Inventories of homes for sale are about 40 percent lower today than they were two years ago. In some areas—Northern California, Phoenix, and Denver— the shortage of listings is more severe.
Homes in the lower price tiers, including starter homes for first-time buyers, are especially scarce. First-time buyers with limited pocketbooks are finding themselves on the losing end of bidding wars or unable to compete with cash buyers. Many future buyers continue to rent, waiting for their dream home to hit the market.
While some renters surveyed enjoy that lifestyle and plan to remain renters, many more plan to use SFRs as the first step in their journey toward homeownership.
Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.
Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.
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