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Are Home Builders Locking Out First-time Buyers?

construction-twoHome builders' focus in recent years has continually been on expensive properties, which could be placing a damper on the homebuying process for first-time shoppers.

Although home builders are focused on more expensive homes, they are responding to underlying demand conditions, a report from Capital Economics found.

The report also pointed out that first-time homebuyers who typically search for homes that are under $200,000 are not deterred by home builders in the market. Further, as credit standards begin to ease,  new, cheaper homes will be put on the market.

Capital Economics believes that housing demand will continue to rise due to the large share of young adults living with their parents that will eventually want to become either renters or homeowners. New data for March found that the share of 18 to 34 year-olds that live at home is now at 31.5 percent, slightly off the record high.

"Indeed, given that mortgage interest rates are close to record lows, credit conditions are gradually being eased and employment is above its pre-crisis level, it is something of a puzzle that the share has not already declined," the report said.

Instead, the report noted that the lack of available homes on the market is what is holding back demand among first-time buyers. "Both the rental vacancy rate and months’ supply of homes for sale are currently very low. And in the new homes market–where overall supply constraints are not so bad–builders have been focusing in recent years on the more expensive segment of the market," the report said,

"That said, it is possible that as credit conditions have slowly improved, builders may have been slow to respond. In that case, a lack of suitable, cheaper new homes could have put a short-term break on household formation," Capiral Economics stated. "However, there are signs that homebuilders are now shifting production to less expensive properties. Despite growth in existing house prices accelerating in recent months, the median new home price has edged back since November of last year."

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