June 20th, 2012 12:02 AM by Lori Speight
By Julie Schmit, USA TODAY
CITRUS HEIGHTS, Calif. – Alex Dorado thought that buying his first home was going to be easy.
Dorado, 25, found his first love in February, a 1,200-square-footer in this Sacramento-area suburb. Before he put his offer in, he took his parents to see "where I was going to live," only to discover the house was already sold.
He lost more than a dozen other bids on homes, often to cash-packing investors, before he landed a $134,000 fixer-upper in May with a low-down-payment Federal Housing Administration (FHA) loan. Now, he's upgrading the home, which sits on a blue-collar street with dented cars parked in two nearby driveways.
As the nation's housing market shows signs of bottoming after years of declining prices, many first-time buyers such as Dorado are getting a rude awakening. Instead of having their pick of homes to buy in some markets, they're losing houses to cash buyers and bidders with bigger down payments, or they're facing bidding wars spurred by shrinking numbers of homes for sale.
The competition can be most evident for lower-price homes in markets hard-hit by foreclosure, such as Phoenix, Miami and parts of Southern California, or those with relatively strong economies, such as Washington, D.C., and San Francisco, Realtors say.
First-time buyers who use FHA loans might be in for the toughest time. They're frequently low-down-payment bidders. FHA loans might also require sellers to do more home repairs than do other loans, such as fixing chipped paint on older homes, Realtors and lenders say. If sellers receive multiple offers, they may avoid FHA offers.
"FHA buyers are getting pushed to the bottom of the pile," says Brian Cross, a Phoenix-area Realtor for Keller Williams Realty. "It's much different than a year ago."
Even first-time buyers with conventional loans and 20% down payments have been surprised by the competition.
"I thought it was a buyer's market ripe for the picking," says Jason Leggett, 25, an aerospace engineer at John Hopkins University Applied Physics Laboratory near Washington, D.C. He recently bought his first home, beating four other bidders.
Before that, he'd lost out on six offers. He probably won his $459,000 colonial because he had guaranteed financing, Leggett says.
Rates low, but loans difficult
Nationwide, 35% of existing single-family home buyers in April were first-timers, according to the National Association of Realtors. In healthier times, first timers account for 40% to 45% of the market, says NAR chief economist Lawrence Yun. Tight credit and a still-shaky economy have kept many first-timers out of the housing market, he says.
But low interest rates are luring more buyers, as are home prices that are down 35% from their 2006 peak.
Dorado decided to buy after discovering that it would cost less than renting. One-bedroom apartments in his area ran about $950 a month. His mortgage, after putting about 3.5% down with an FHA loan and securing a 3.875% interest rate, runs $925 a month. That includes everything but utilities.
"And I have three bedrooms and a pool," says Dorado.
It now costs more to rent than to own a home in 98 of the top 100 U.S. metropolitan areas, says real estate website Trulia, which tracks rents and home prices. In some of those markets, however, the inventory of homes for sale has shrunk.
In May, Phoenix had 66% fewer lower-price homes listed for sale than it did a year ago, says an analysis by real estate website Zillow. It counted listings in the bottom, middle and top price ranges in 100 leading markets.
While the bottom tier nationwide experienced an average 12% decline overall, Las Vegas, Colorado Springs and San Francisco saw more than a 50% drop, Zillow's data show.
Inventories also shrank faster than the national average in Minneapolis; Charleston, S.C.; Seattle; Washington, D.C.; Miami; and parts of Southern California, Zillow says.
Since February, Lucy Redonda, 25, has lost 10 bids she made on townhomes in Miami. Cash buyers have been her nemesis, she says. To counter, she got more aggressive, moving from bids just under the asking price, to asking, to $5,000 above, then to $15,000 more.
"I still didn't get the home," says the registered nurse.
Finally, she raised her down payment, from 10% to 25%, and scored a win for a $120,000 condominium.
In Dorado's part of Citrus Heights, home listings have shrunk rapidly. As of mid-May, the area had less than a month's supply of homes for sale, based on the current pace of sales, says Joanie Cubias, of Lyon Real Estate, which tracks such data. That's down from a three-month supply a year ago. Realtors consider a six-month supply a balanced market.
As with Redonda in Miami, Dorado also had to raise his Citrus Heights home-shopping tactics.
He looked at dozens of houses. He scoured real estate listings constantly. He discovered that new ones hit the Redfin real estate site at midnight. If he liked one, he'd tour it the next morning.
Before, he'd visit homes with his Realtor on weekends. They'd arrive, and "people would be waiting in cars" to get their turn to tour the house, he says.
The power of cash
First-time buyers are running into tough opponents in cash buyers. They accounted for almost a third of existing home sales in March and April, the National Association of Realtors says. Before the housing crash, cash buyers accounted for less than 10% of sales, NAR says.
More than 53% of first-time home buyers use FHA loans, the April Campbell/Inside Mortgage Finance HousingPulse Tracking Survey indicates.
FHA loans have a minimum down payment of 3.5% and take weeks to close. Conventional loans have bigger down payments and can close faster, Realtors say.
Cash deals close fastest, and they don't involve an appraisal, which lenders require before they make loans. Sellers like cash offers because there's less risk that they'll fall through, so they most often win, says Phoenix-area Realtor Keith Krone.
Krone recently listed a $125,000 bank-owned home and got 11 offers in two days. The winning bid? An investment company paying $130,000 in cash. Some bidders offered more but required financing, Krone says.
Through the years, FHA appraisals have become more aligned with those for conventional loans, FHA lenders say. But there are still differences, mostly on health and safety issues.
An FHA appraisal, for instance, will look for chipping, peeling or cracked paint on older homes. If found, FHA says "it's got to be fixed," says appraiser Fred Ebert of La Verne, Calif., who does both types of appraisals. The concern is that the paint may contain lead, a health hazard. A conventional appraisal would likely leave that decision to the buyer, Ebert says.
An FHA appraisal might also require that hand rails be put in stairwells, something a conventional appraisal likely wouldn't require, says Mike Lyon, head of operations for Quicken Loans, the nation's No. 2 FHA lender.
Some sellers reject FHA offers because they don't want to "deal with repair requests from FHA lenders," says Redfin real estate agent Sonal Basu, who works in the San Francisco Bay Area.
Lyon also says FHA home-loan purchases have a higher probability of not closing than do conventional loan purchases, in part because of appraisal issues and also because FHA borrowers tend to have more limited finances.
FHA's appraisal standards don't have any "extraordinary requirements" beyond those for conventional loans, says Brian Sullivan, spokesman for the Department of Housing and Urban Development, which oversees FHA. Pre-sale health and safety repairs protect borrowers, especially since they may not have funds after the purchase to do repairs, he says.
Sometimes, FHA buyers don't even make it to the appraisal stage.
Dan and Sarit Biegel recently purchased a home in Irvine, Calif., using an FHA loan. They started shopping in February and found one house they loved. They made an offer and heard nothing. Thinking they'd improve their chances, they wrote a letter to the seller explaining how much they loved the house. Unbeknownst to them, the seller had received at least 10 other offers and had accepted one of them.
"Because we were FHA, they didn't even get to our offer," says Dan Biegel, 33, a software marketer.
The Biegels later won against four other bidders. Meeting the seller helped, Biegel says. She told the couple she didn't want her house to go to an investor, Biegel says.
Rising prices could boost supply
Home inventories have shrunk because fewer foreclosures are coming to market. Many homeowners don't want to sell, because they don't have enough equity in their homes. Others are waiting for higher prices.
"They've waited out five years of declining prices and don't want to sell at the bottom," says Stan Humphries, a Zillow economist. As home prices increase, more sellers will likely emerge, he says, which will add inventory. Or, buyers might back off if the economy softens.
Brent Harlow, 36, of Seattle, is betting that prices won't rise fast enough to justify getting into bidding wars now.
In May, the Seattle area had a 1.7-month supply of homes for sale, according to the Northwest Multiple Listing Service.
Harlow, a Boeing engineer, has been shopping for his first home since April. He explored making offers on four homes. Cash buyers had already bid them out of his range, he says. He might wait on a home purchase to see if the market cools. To successfully compete for a home "feels too rushed," he says.
Dorado is happy to be across the finish line.
Since he moved into his formerly bank-owned home in May, he's cleaned the pool, turning black water to blue. His hydrangeas, which were almost dead, are in full bloom. He's repainted chipped paint, outside and in. The home that sat vacant for a year is now one of the snappiest on the block.
"This looks like a completely different house," Dorado says.