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Tight credit squeezing first-time homebuyers out of market

First-time homebuyers are having a tough time getting credit and are slowly being replaced by investors, largely using cash.
First-time homebuyers are having a tough time getting credit and are slowly being replaced by investors, largely using cash.Gene J. Puskar / AP

Investors may be reaping the rewards of the housing recovery, but regular buyers, especially single and first-time buyers, are still on the outside looking in.

Tight credit has kept some financially qualified buyers from getting the loans they need, according to a new survey from the National Association of Realtors. The overall market share of single buyers fell from 32 percent in 2010 to just 25 percent today, according to the report.

"Single home buyers have been suppressed for the past three years by restrictive mortgage lending standards, which favor dual-income households who are more likely to have higher credit scores," noted Lawrence Yun, chief economist for the Realtors.

First-time buyers, who usually represent 40 percent of the market, have been falling steadily out of the market, especially lately, with the surge in mortgage rates. While this annual report puts them at a 38 percent share, the Realtors' September home sales report shows they bought just 28 percent of the homes sold in the month.

First-time buyers are also considered instrumental to a recovery historically, because they create the move-up market, but investors, largely using cash, have replaced them.

Negative equity has also kept many potential buyers and sellers on the sidelines, but 2.5 million borrowers came out from underwater in the second quarter of this year, according to CoreLogic, which could put more supply on the market in the coming months.

Unfortunately, sellers are finding waning interest. Forty-three percent of sellers surveyed by Redfin, a real estate sales and data company, said they were disappointed in the buyer interest in their homes. The percentage of those who think it is a "good" time to sell fell sharply, from 48 percent in the third quarter of 2013 to 34 percent now. Their top concern about listing their home: "general economic conditions."

The slowdown in signed contracts to buy a home this fall has caused some analysts to revise down their expectations for the year's total sales. Capital Economics dropped its forecast by 100,000 sales to 5.1 million, but they see this as more of a pause than a reversal in the recovery.

"There are still reasons to be optimistic about the medium-term outlook for existing home sales. After all, even after the recent increase, mortgage interest rates remain low and affordability and valuation metrics are favorable," according to analyst Paul Diggle.

Diggle also dropped his 2014 estimates, given the lower starting point, but without knowing what the new banking regulations for mortgage lending will be, it is impossible to gauge sales for next year accurately. There is new concern in the lending industry that federal regulators could require mortgages have a 30 percent down payment in order to be securitized without the lender facing 5 percent risk retention. That could further exclude first-time and single home buyers.

The good news, though, is that Americans still desire homeownership. Sixty percent of first-time buyers and 12 percent of repeat buyers cited that as the primary reason for buying in the past year, according to the Realtors' survey. Eight out of 10 buyers said their home is a good investment, and 44 percent called it better than stocks.

The Realtors survey sampled nearly 150,000 home buyers and sellers, who purchased their homes between July 2012 and July 2013.

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

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