First-time homebuyers jolt market into life

Low home prices and an array of incentives have sparked a surge of new buyers.

Al Behrman/AP
Optimistic: After months of falling home sales, first-time homebuyers contributed to the biggest monthly jump in sales in February. A sold sign was posted outside a home in Cincinnati last month.

Ucilia Wang is eager to reclaim her kayak and camping gear from a friend’s garage. There’s simply no storage in her tiny one-bedroom apartment in Oakland, Calif. She wants a yard, too. Maybe even two bathrooms.

Ms. Wang, who is single and writes for the technology news website Greentech Media, is
set to join a surge of first-time homebuyers in California and across the country who are taking the plunge into the still-shaky housing market, exchanging rents for mortgages.

Lured by a combination of a drastic drop in home prices, expanded Federal Housing Administration (FHA)-insured loans, record-low interest rates, and an $8,000 federal tax credit, these newcomers are breathing new life into a beleaguered market. Their entry, many hope, will help slow the fall in home prices and sales.

First-time buyers bought more than half of the existing homes sold in February, according to the National Association of Realtors, and helped add to the 5.1 percent increase in sales from the month earlier. Existing home sales in February rose to 4.72 million units in the biggest monthly jump since July 2003.

Lured by low prices

Wang realizes there's some risk to buying now: prices could slide further; the economy could worsen. But, she says, it’s a chance she’s willing to take. Like others who have decided that now is the time to buy, she has been enticed into the market by the huge drop in prices around her neighborhood.

In Oakland, the median home price dropped 66 percent over the past year to about $145,000, according to MDA DataQuick, a California-based real estate research firm. In her sought-after neighborhood of Piedmont District, Wang is finally finding homes in her price range of about $500,000, which would have been hard to come by two years ago.

Across the country, prices dropped 19 percent in January compared with the year earlier, according to the Standard & Poor’s/Case-Shiller index of home prices in 20 major cities.

“You don’t have to spend $500,000 for a one-bedroom condo [anymore]. You might be able to get a single-family house for that now,” says Marci Orler, a realtor in San Jose, Calif., who bills herself as a first-time homebuyer specialist.

With six active clients, Ms. Orler is much busier today than she was this time last year when few first-timers, or anyone else for that matter, were shopping for houses. Prices have finally fallen to a level that people without equity can consider buying, she says.

FHA fuels the spurt

Much of the spurt in sales to first-time buyers is due to the Department of Housing and Urban Development (HUD) lifting the cap on its FHA-insured loans as part of the stimulus package passed under the Bush administration. On Jan. 1, the FHA raised the limit on the mortgages that it would insure to $729,750 in some high-cost parts of the country, such as the Bay Area.That is well above the previous cap of $362,790.

For many middle- and lower-income buyers, FHA is the only way to get a mortgage as it just requires a 3.5 percent down payment – compared with 20 percent for conventional loans – and qualifies borrowers with less-than-stellar credit.

“That’s about as good as it gets these days,” says Andrew LePageof DataQuick. The FHA, which now insures the vast majority of first-time buyers, covered 40,692 mortgages in February compared with 23,413 the year before.

“FHA loans are an important fuel for the sales activity we are seeing right now,” says Mr. LePage.

But with warnings that the bottom of the housing market is not yet in sight, and that hard times are still ahead, the increased FHA role carries some serious risk for the federal government. The Wall Street Journal reported last week that “home mortgages insured over the past two years by the Federal Housing Administration are falling into delinquency at a faster rate….”

“It’s risk that has to be managed,” says William Apgar, senior adviser to Shaun Donovan, the new HUD secretary of Housing and Urban development. The bigger risk, he says, would be to do nothing to fix the housing market.

States are also taking measures to nudge more real-estate newbies from the sidelines of the housing market and into a new home. Colorado will give first-time buyers up to $6,000 for a down payment and closing costs – money that would be repaid to the state once the buyer receives the $8,000 federal tax credit. New Mexico, Missouri, and Ohio reportedly have similar programs.

Riskier than it seems?

Some question whether now is really the right time to buy. Analysts expect it will be years before home values begin to appreciate again at rates of 4 to 5 percent annually. And unless prices climb within the next few years, some first-time buyers could find themselves “worse-off rather than better off” in the short-term, says Adam Koval, founder of, a San Francisco real estate website.

Orler, the San Jose realtor, tells her buyers: If you can ride out this wave and stay put for five to seven years, prices will go up.

“I’m optimistic,” she says. “Things are going to turn and real estate is going to appreciate again."

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