Home price inflation has cooled a bit, mortgage rates remain relatively calm, and the market continues to feel the drag of being harnessed to what may be the slowest economic recovery in history. This is good news for all those prospective home buyers — particularly live-at-home Millennials – who worried they were being left in the dust by another “runaway housing market.” This well-publicized wild thing’s been reined-in by economic realities.

first-time home buyers

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As the “Great Recession” first began to slowly loosen its grip, housing market speculation by investors set home prices free in 2012 and 2013. Fixing and flipping kept inventory lean while prices rose at the breakneck pace of the prerecession “housing bubble.”

Housing market recovers slowly

Then, after a slow start to 2014 which was blamed on bad weather in many parts of the country, the national market gradually eased into a new status quo. The housing sector continued to recover, but without a lot of drama.

“While the spring selling season was softer than anticipated by us and the investor community,” reported home builder Lennar Corp.,”the home building recovery continued its progression at a slow and steady pace.”

“We continue to look for an extremely gradual recovery in housing demand,” added Wells Fargo Securities.

The reasons for the glacial pace at which the market seemed to be moving were many and varied.

Public psychology was scarred by the burst housing bubble. The hangover effect was shaken confidence and significantly changed attitudes about owning property, said economist Karl Case, co-developer of the S&P/Case-Shiller home price index.

Additional fallout from the bubble rained on bankers who stayed wary of borrowers with poor credit scores.

“[Banks] stopped making ‘sub-prime’ loans to households with especially poor credit histories,” according to a report from the Federal Reserve Bank of Boston. “Households with credit scores below 620 essentially lost any access to mortgage borrowing.”

Absence of first-time home buyers

Deeper disturbances afflicted the market as historically important players simply failed to show up for their roles. Participation in transactions by first-time home buyers was at near-record lows.

“The first-time home buyer is really absent,” said David Crowe, chief economist for the National Association of Home Builders. He explained that only 16 percent of new home sales were to first-time home buyers and that’s half of normal.

In the wider housing market, first-time home buyers only conducted 29 percent of the transactions, compared to the traditional 40 percent of the past. Without first-time home buyers, established homeowners can’t make move-up purchases, and the homeowners they would buy from are similarly left out.

The young people destined for the role of first-time home buyers — Millennials — were instead still living in their parents’ homes in greater numbers than any generation in recent history. According to a Harvard University housing study, Millennials were burdened with low incomes, tight credit, job insecurity and mounting student loan debt.

In fact, the study said some 2.1 million more adults in their 20s lived with their parents last year, and their student loan balances increased by $114 billion.

Foreigners and their interest in U.S. real estate

So who kept our housing market going? Overseas buyers and new immigrants to this country. These international buyers piled up nearly $100 billion in home purchases for the year ending in March, according to the National Association of Realtors. Foreign investment in American real estate was the highest ever and was increasing at a rate of 35 percent annually.

International buyers came from all over the world, but Canada, China (the PRC, Hong Kong and Taiwan), Mexico, India and the UK accounted for more than half of all reported international transactions. Canada maintained the largest share of purchases while China held the lead in dollar volume.

Many homes purchased by foreign buyers were used as a primary residence but others were used for vacation or rental purposes or as an investment.

International buyers were more likely to make all-cash purchases when compared to domestic buyers. In 2014, nearly 60 percent of these transactions were all cash, compared to only one-third of domestic purchases. Mortgage financing tended to be a major problem due to a lack of a credit history in this country.

Cash buyers from overseas, as well as domestic investors who were also likely to make cash offers, dominated a marketplace where their competition was would-be buyers forced to wait for mortgage approval — no matter their other qualifications and needs for a home. Many Americans who wanted to buy were instead forced to rent despite the dramatic rise in rental costs in recent years.

Problems continue to plague the economy

So the lack of affordable housing was no longer a problem unique to a narrow segment of society.

“Middle-class families are having a hard time finding housing they can afford,” said Lisa Sturtevant, director of the Center for Housing Policy. “We used to think about affordability as something that affected low-income families, it’s really moving up the economic ladder.”

In California, a report from the state’s nonprofit Housing Partnership Corporation determined that Californians needed almost one million additional affordable housing units built statewide, and that Los Angeles County alone needed nearly a half-million units built, to ease the current housing crunch.

Perhaps those “missing Millennials,” so conspicuously absent from today’s housing market, will help turn the tide. As time passes, they can gradually make their numbers and power felt as the nation’s first-time home buyers. According to the Harvard housing study, by 2025 there will be 2.7 million more 30-somethings in the nation’s real estate marketplace. That wave of homeowners in their 30s will assert itself by boosting demand for more housing stock nationwide.

At least Millennials were confident about their financial future. According to a recent Pew Research Center study, more than eight-in-ten of the Millennial generation said they currently have enough money to lead the lives they want or expect to in the future.

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