Return of the first-time homebuyers

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Here’s one more way the housing bust has changed the rules of the real-estate world: In this market, first-time buyers are getting the VIP treatment. Indeed, they’re the star players in a nascent market revival. New buyers accounted for almost half of all sales during the first part of the year, well above historic levels, according to the National Association of Realtors.

Tanking prices have certainly drawn the newbies in; J.K. and Nicole Harvey, for example, just snagged a three-bedroom Dutch colonial in Trumbull, Conn., on a corner lot – after bidding $50,000 less than the asking price. Low interest rates and a new federal tax incentive are making a difference too. But more than anything, first-timers are benefiting from not being homeowners. They don’t have to worry about selling their current homes, most likely in a down market, to raise money for new ones. “The world is their oyster right now,” says Mike Larson, real estate analyst with Weiss Research.

Small wonder that agents are now gladly tagging along as the “kids” kick the tires on starter homes. That’s a big change from the way things used to be: For most of this young century, the real estate scene was dominated by homeowners trading up, flipping properties or snapping up vacation homes. Bubble-driven prices meant that even “starter homes” were out of reach for younger couples. Brokers and agents shunned first-time buyers because they needed too much hand-holding and, of course, because they weren’t that lucrative – why waste time peddling $150,000 condos when you could make seven times as much money selling a single $1 million McMansion? But today, new buyers with humbler aims are just as likely to get the red-carpet treatment.

Right now, of course, buyers of all types face what seems like an unprecedented opportunity. This year the housing affordability index reached its highest point in almost 40 years. But not every “SOLD” sign is a marker on the path to prosperity. Despite signs of improvement in a growing number of markets, hardly anyone expects a quick return to boom times. That’s partly because first-timers are more willing to scoop up bargains at the bottom end of the market than jump into a bidding war. And buying a home can be trickier and scarier than ever. Still, virtually everyone agrees that the housing market won’t fully recover until buyers soak up the bloated inventory of available homes – in other words, until the rookies come through.

TAX BREAKS FOR ROOKIES

First-time buyers owe some of their time in the sun to Congress and President Obama. This year’s stimulus bill included an $8,000 tax credit aimed at first-time buyers – and it wasn’t long before those newbies got wooed by a business-starved real estate industry. Phoenix-area builder Fulton Homes blasted its mailing list with information about the tax credit and material promoting homes tailored to young couples. Over a recent 12-week period, the company sold 120 homes to first-time buyers, says Dennis Webb, Fulton’s vice president of operations.

Brokerages like Watson Realty, in Jacksonville, Fla., have issued buttons to their agents that read “Ask me about the $8,000 tax credit!” Mike Crowley, a broker in Spokane, Wash., even hosts a regular seminar for first-time buyers.

He provides pizza and soft drinks, but that’s a pittance compared with the $3,000 he budgets each month to promote the classes on radio and television. These days the seminars focus special attention on the tax break. Crowley says the workshops have helped his office sign up more than 30 clients in the past year. “We’ve got it dialed in now,” he says.

But for all the love it’s getting, some say the credit’s impact is limited. For one thing, $8,000 is a drop in the bucket for shoppers in expensive housing markets in places like the Northeast and California. The credit’s income ceiling – it does not apply to couples earning more than $170,000 – isn’t mentioned on those buttons. And the credit often isn’t enough to get a first-timer over the down-payment hump. In fact, the typical newbie can come up with only a small fraction of the 10 to 20 percent that most banks are looking for these days.

All of which means that many first-timers are getting into real estate in a more traditional way – with help from Mom and Dad. Erik and Jessica Wackenstedt of San Diego shopped for months before finding a row house with Pacific Ocean views, marked down to $530,000 from $700,000. Erik’s father, Lars, loaned the couple $225,000 to make a hefty down payment. Lars’ motives weren’t entirely unselfish; he says he felt that payments from a loan to his son could provide a more reliable income than any of his other investments. There were other strings attached to the assistance: When Erik originally asked for help a year ago, Lars refused, saying that prices were “on the stupid side.” (In this case, obviously, Dad was vindicated.)

THE BANK OF MOM AND DAD

While nobody tracks loans like these, some families see them as a win-win. The youngsters receive financing at a rate much cheaper than they would find at a bank, while the older lenders get to help their kin and still collect an income. Elders who are feeling flush can still make gifts, of course. Each donor can give up to $13,000 each year to each relative, tax-free. In the Harveys’ case, Nicole’s family gave her money from a trust that was supposed to remain sealed until Nicole, who’s now 33, turned 40. Ultimately, it was Nicole’s father, Oscar Marcos, who decided that giving up a few years of investment gains was a tolerable price to pay for getting a cheap home.

While their parents may be stepping up to the plate with help, some new homebuyers say real estate agents are only making their lives harder. Michael McLane, a 23-year-old educational consultant from Tempe, Ariz., started shopping for a home online in March and attracted a swarm of brokers. “As soon as I put my information in, they were on me like chicken hawks,” says McLane, who wound up needing a new e-mail address for all the spam he got from desperate agents. His answer? Sidestepping them and buying a home directly from a builder.

But some buyers say it isn’t always that easy, especially when the relationship with the agent gets further along. They tell stories of agents pushing them to buy from their brokerage’s listings (as opposed to the complete local inventory), while others report sellers’ agents who call several times a day. Once a deal gets to the contract stage, many cash-strapped brokers have been adding “document preparation” fees and other vague surcharges, according to Barry Zigas, director of housing policy for the Consumer Federation of America. Zigas adds that many first-timers are unaware of cozy ties between agents and the lenders, home inspectors and title companies they recommend – relationships that can boost a buyer’s costs. (A spokesperson for the National Association of Realtors says such fees and relationships should always be disclosed to consumers.)

LOOKING FOR ‘MOVE-UP’ BUYERS

Even well-meaning brokers aren’t all thrilled by the influx of first-timers, with some complaining that they offer a toxic mix of cluelessness and arrogance. But others have a deeper economic worry: By focusing on cheaper homes, the thinking goes, the new buyers are pushing average prices down, which in turn discourages “move-up buyers” – growing families and upwardly mobile types who would normally be trading up to something more luxurious. “For the overall market to recover, we’ve got to get people into that move-up market,” says Jim Gillespie, president and chief executive of Coldwell Banker Real Estate.

Gillespie is among the throng of real estate honchos pressuring Congress to increase the current tax break from $8,000 to $15,000, extend its duration and make it available to all buyers, regardless of their income or whether they’ve bought before. The price tag: an estimated $36 billion. Naturally, among the beneficiaries would be people who overpaid and overborrowed for the houses they’re in now.

By comparison, this generation of first-time buyers is more cautious. The kids want fixed-rate mortgages they can easily afford, and they aren’t merely looking for a property to flip. A National Association of Realtors survey showed that the average first-timer hopes to stay in the home for 10 years, up from seven at the peak of the boom. Regardless of how long first-timers stay, many economists believe these buyers can tip the first domino and kick-start the rest of the market. As Mark Markelz, a broker in Fairfield, Conn., puts it, “Without first-time buyers, you are going nowhere.”

2009 Copyright The New York Times Syndicate