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Raub Report July 2015

July 28, 2015

Is the New Home / First Time Home Buyer a disappearing breed?  If you are young college graduate and just married, then, you want to buy a new home don’t you?  However, twenty-somethings are having difficulty with the down payment and the necessary credit scores to buy a house.  So they must save more and maybe rely on generous parents and grandparents to help them out.

In San Antonio in the past, the housing market was always buoyed by the first time home buyers who made up nearly 40% of the new home sales.   But now, they have very strong headwinds – high student loan debt,  FHA down payments of 3.5% (which is much higher than they used to be), higher home prices (much higher than they used to be), and tough credit requirements (much tougher than they used to be).   So, the first time home buyers’ percent of the market has dropped from 40% to under 3%!  That’s a lot.  The theory in the old days of Ray Ellison, is they could put you into a new home for the monthly payment of an apartment rental, and the down payment was minimal.   Now, it is at least $7,000 cash (figure 3.5% x $200,000 at the minimum for a new home; but even “starter homes” may be more).

So, the first time home buyers are going for the pre-owned homes in older neighborhoods at $150,000 or less, assuming it’s a good school district for the kiddos.  The hitch there is we have only about a 2 month’s supply of homes for sale at this time in San Antonio; 6 months of supply is considered balanced and 2 month’s supply is very decidedly a Seller’s market.  Realtors are taking classes on how to handle multiple offers and how to manage bid-sales, where all interested buyers make their offers and the Seller picks the best one.

This slack in first time home buyers for new homes means fewer new homes starts, by perhaps 3,000 per year.  Now, new home starts are still at a very healthy 9,000 per year, but this is below the 12,000 or so we would expect in the “old normal.”

All this then means more multifamily construction. Where we used to feel good about 2,500 new apartment units a year, and scared of 4,000 per year, in 2014 we absorbed 8,000 units with no problem (oh, and the rents are much higher than they used to be), but we are not overbuilt. In fact, developers are showing discipline by pulling back a little on new starts over the next 12 months, just to be on the safe side.  (Baby Boomers are downsizing, too).

It is a very good thing for the young folks to be investing in their first new home.  New home sales create all kinds of consumer demand which then generates increased retail sales, like furniture, appliances, curtains, landscaping, even fixer-upper items for pre-owned homes, etc.  This is the virtuous circle of our economy and why we want to stimulate home construction.