Have Young Buyers Been Priced Out?

While last year’s rising home prices brought relief to many underwater homeowners, allowing many older homeowners with increased net worth to purchase new homes, they also precluded many young first-time buyers from purchasing, according to a report from Houston, Texas-based BBVA Group, a global financial services firm.

“Older homeowners are increasingly able to purchase a new residence with cash only after they sell their current home,” said Jason Frederick, an economist for BBVA Compass.

In December 2013, 42 percent of residential home sales were made in cash, a significant increase from just 18 percent a year earlier.

With many older Americans feeling confident as their net worth rises with their home values, homebuilders are now targeting potential buyers 55 years old or older, according to BBVA.

Younger Americans who do not yet own a home find themselves in a very different situation from seasoned homeowners. Home price growth has outpaced income growth, and according to Frederick, “[Y]oung families will need to see faster income growth and save additional money to make a larger down payment.”

Prices will continue to rise this year, but appreciation will slow from the 11.5 percent annual gain last year to a pace of 8.5 percent for 2014, according to BBVA’s projections.

Gross domestic product (GDP) and employment will also improve this year, according to BBVA. GDP will grow by 2.5 percent this year, and the economy will add 2.4 million jobs. These improvements will carry over to the residential market, translating to 2.1 million new households over the next two years.

“[H]ousehold formation will increase with economic growth because both immigration rises and young people move out of their parents’ houses,” BBVA said in its report.

However, many of these new households will enter the rental market rather than the purchase market. BBVA predicts rental households will grow by 1.2 million over the next two years, while owner-occupied households will grow by 900,000.

Home sales will rise in 2014, according to BBVA. Existing single-family home sales will rise 4.2 percent over the year to about 4.7 million, while new single-family home sales will jump up 13.4 percent over the year to about 490,000.

With inventory low, BBVA predicts a 17 percent increase in housing starts this year. Single-family housing starts will total about 810,000, and multifamily starts will total about 274,000 for an overall addition of about 1.1 million housing starts.

The healing market will also encounter fewer foreclosures this year than last. BBVA predicts between 700,000 and 800,000 foreclosures this year, down from 1 million last year.