BUSINESS

Young homebuying stalled by recession but coming back

Peter Johnson
pjohnson@greatfallstribune.com
A faded for sale sign sits in empty lot in the Riverview area.

There are fewer first-time homebuyers than in the past, in part because tighter lending rules and greater student loan debt make it harder for young adults to buy their first homes, experts say.

A shortage of moderately priced homes in Great Falls and other major Montana markets is also a contributing factor.

However, bank and housing officials say they’ve observed an uptick in housing interest recently among the 20- to 35-year-old group and say homeownership is still viable if young adults set realistic goals and seek financial counseling to improve their credit record.

During the Bureau of Business & Economic Research economic outlook tour of the state early this year, First Interstate Bank executives Paul Olson and Sue Larew discussed why the decreasing share of first-time homebuyers is occurring and how that harms overall home sales.

The share of first-time homebuyers has dropped from 40 percent to 30 percent over the last five years, according to the National Association of Realtors. That’s significant, said Larew, a vice president at Missoula First Interstate Bank, because first-time homebuyers have traditionally been a cornerstone of the housing market.

“When they buy homes, they create a ripple effect that allows other homeowners to move up to bigger homes or new locations,” she said. “That turnover is critical to momentum in a thriving home sector.”

College debt, tightened credit blamed

Saving for a down payment may be rougher for younger, 20- to 35-year-old home seekers now for several reasons, Larew said.

Many of them went to college during the 2008 recession, obtaining a better education since jobs were scarce, but racking up high student loan debts. One survey reported last fall said the average college loan debt among Montana students was $27,568, 20th highest in the nation.

And mortgage credit rules were tightened after the 2007 housing crisis, requiring homebuyers to have better credit ratings and less debt while making higher mortgage down payments.

In addition, some young adults are hesitant to buy homes and be tied down, Larew said, adding that many heard their parents say they wish they hadn’t bought such big houses, or leveraged such a big loan during the easier credit times from the 1990s to 2007.

Yet there still are considerable benefits for young adults to buy homes, Larew said, such as putting down roots in a community to raise a family, while building up equity over time and securing the tax advantages of deducting mortgage interest payments and real estate taxes.

“The opportunity for many young adults to buy a home is not insurmountable if they get financial counseling from a mortgage banker or housing program such as NeighborWorks,” she said. “They might need to be realistic about consolidating and paying off some debt and seeking a small starter house at a price they can afford.”

Paul Olson

Olson, who leads First Interstate’s three-state residential mortgage group out of Billings, agreed that mortgage rules applying to down payment and credit history returned to the tighter standards of the 1970s through the 1990s after relaxed rules helped create the housing crisis of a few years ago.

Home interest growing among young

Even so, things are getting better, Olson said.

“We’re seeing a lot of interest by young adults and other first-time homebuyers over the last 12 months,” he said. “One of the biggest hurdles they’re facing is a tight inventory of homes they can afford. There’s a relatively scarce and therefore hot market of houses selling at $250,000 and less.”

The Great Recession stalled new home construction in Montana and nationally, creating pent-up demand that Olson likened to “a pig going through a python.” Unfortunately, the cost of building materials never dropped, he said, adding, “Contractors can build a new home for less than $200,000, but buyers won’t get a lot of square footage or deluxe features in such houses.”

Credit is available, he said, but homebuyers typically are required to make a hefty down payment of 20 percent of the home’s cost, although qualifying first-time homebuyers can get an FHA loan for a 3.5 percent down payment. Large student loan debt can limit the ability of young adults to buy a larger house, he said, since they can’t have more than 45 percent of their income go to paying debts.

“It’s very normal for young couples and individuals to get credit counseling from bankers or home programs,” Olson said. “They’re likely to get tips such as how to restructure and pay down loans, close out credit cards, change their spending habits and sell assets they’re not using, such as boats.”

Midrange market competitive

Terry Thompson

Great Falls has had a relatively stable housing market in the years 2010 to 2015 following the housing crisis, said Terry Thompson, CEO of Great Falls Association of Realtors. Annual home sales swung between 620 and 726 during that period, as the medium sales price edged its way up to $163,000.

But the market has gotten tighter and more competitive the first six months of 2015 compared to the same time period of last year, she said, with the average days on the market for a listed home only 88 days, compared with 107 days the first half of last year.

The inventory of Great Falls houses listed for sale now in the $163,000 to $177,000 price range — the median price range of the last two years — is only 27, indicating it’s a seller’s market, with multiple offers likely to be made, Thompson said.

If young house seekers do spot a house they like in their price range, they should consider offering a bid quickly, said Betsy Cayer, a Realtor with Dahlquist Realty. There’s a shortage of good houses in the starter price range of $150,000 to $185,000, she said, adding, “It’s really difficult to find decent houses for $150,000 and below that don’t require a lot of repair work.”

Cayer said she’s helped several young couples buy homes, and noted that Veterans Affairs offers a low down payment and favorable rules for military and retired military members with a good work and credit history.

Laura Vukasin

Laura Vukasin, CEO and president of Prairie Mountain Bank, said federal regulators and the mortgage industry itself increased down payments and credit rating scores after the mortgage and housing crisis of 2007, “making it much more difficult for young people with steep student loans to buy homes.”

But all potential homebuyers can help themselves by going to a banker or mortgage lender for advice on getting prequalified for a mortgage, Vukasin said.

The bankers, or other financial counselors, will look at the prospective buyer’s finances, credit agency reporting score and cash flow and estimate how big of house payments they can afford, including principal, interest, taxes and insurance.

Doing so will let them know how big of a mortgage they can afford and allow them to make a prompt bid when they find a house they like, she added.

Such counselors will tell people how to improve their credit rating, which could lower their mortgage interest rate and payments, by such means as reducing their number of credit cards, always paying bills on time and accumulating some savings for a down payment, Vukasin said.

Surging economy tightens housing market

Sheila Rice

Kelley Aline, recruiter for the growing ADF International steel fabrication plant north of Great Falls that has mushroomed to 200 workers, said it’s difficult to find either houses to buy or rent for young workers and their families.

“When I am recruiting individuals to live in Great Falls, it’s a challenge to find decent single-family homes that are in kid-friendly neighborhoods and affordable,” she said.

The surging economy in Great Falls is increasing demand for homes and rental units for workers, said Sheila Rice, executive director of NeighborWorks Great Falls, a nonprofit that helps low- and moderate-income families get housing.

“NeighborWorks provides virtually the only new home construction below $175,000 locally, so there is a big gap in new homes available for workers,” she said, adding that NeighborWorks’ market study also showed the community is in need of 1,200 additional workforce rentals over the next five years, including 400 immediately.

The nonprofit agency has developed some new loan programs that help moderate-income, first-time homebuyers mitigate the tighter credit rules and higher down payments, Rice said, including one program that requires as little as $1,000 in down payment and another that matches savings to help build money for a down payment.

Most, but not all, NeigborWorks homes are purchased by families below 80 percent of the area’s median income, or $39,400 for a family of two and $49,200 for a family of four.

In NeighborWorks’ Mutual Self Help program, families must put in 1,200 to 1,400 hours of sweat equity in building their house.

NeighborWorks also offers a deferred down payment for low-income homebuyers using city of Great Falls HOME funds. Such deferred mortgages carry no interest and are paid back when the home is sold by the original buyer or when the buyer’s first mortgage is repaid.

And NeighborWorks also offers support for those families making up to 120 percent of area medium income, or $59,100 for a two-person family, and $73,800 for a four-person family, she said. Qualified borrowers must get a private first mortgage at 80 percent of the value of the home, with NeighborWorks providing a “community second” mortgage. Borrowers must put at least $1,000 down.

Homebuyer education is vital

Sheila Rice also called it critical for young first-time homebuyers to learn some basics by getting some counseling, such as attending the homebuyer education class that NeighborWorks offers monthly for $50 tuition at its building, 509 1st Ave. S.

The class is eight hours, usually spread over two weekday nights. But the next class will be Saturday, Aug. 29, from 9 a.m. to 5 p.m. Registration closes Aug. 7. To register or ask questions, call 761-5861.

The class covers budgeting and goal-setting, credit repair, debt reduction and guidance on the homebuying process, including choosing a lender and real estate agent, home inspections and closing on a loan.

Tips from the class to improve credit rating include:

• Open a checking account at a bank or credit union that offers mortgage loans in order to establish a business relationship, which will make it easier to get a credit card or loan later.

• Ask your utility company to report your on-time payments to a credit reporting agency.

• Consider getting a secured credit card or co-signed loan in which a family member assures repayment, but the borrower builds a credit score through on-time payments.

• Lastly, build a credit rating wisely by making sure you make all your payments for everything you owe on time.

In addition, NeighborWorks offers free one-on-one counseling by appointment for people just starting to think about buying a home, Rice said