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Difficulties getting financing are increasingly keeping first-time buyers from buying homes in spite of very affordable prices in most markets. One serious result has been a slowing of the absorption of foreclosures and short sales.

The latest quarter report from the National Association of REALTORS® found that first-time buyers purchased only 35 percent of homes in the second quarter, down from 46 percent in the second quarter of 2010, which was the height of the first-time buyer tax credit.

The latest HousingPulse Survey from Campbell Surveys and Inside Mortgage Finance also showed the proportion of first-time home buyers in the housing market fell to 35.4 percent in June, down from 37.3 percent in May.

As first-time buyer purchases have fallen, the inventory of distressed properties has increased. The HousingPulse Distressed Property Index (DPI) fell to 44.7 percent in June from 46.7 percent in May. The gap between first-time home buyers and distressed property supply was 9.3 percentage points in June, nearly unchanged from the high 9.4 percentage points found in May. A year ago in June 2010, the gap between first-time home buyers and distressed property supply was just 3.9 percent.

Yet price declines this year have made homes more affordable than ever. NAR’s Housing Affordability Index stood at 176.6 in the second quarter, the third highest on record after the first quarter of 2011 and fourth quarter of 2010. The index measures the relationship between median home price, median family income and mortgage interest rates; the higher the index, the greater household purchasing power. Recordkeeping began in 1970.

Why aren’t low prices stimulating sales? NAR’s Lawrence Yun believes it’s the lenders. “With home prices in a broad trough and historically low mortgage interest rates, high housing affordability conditions and rising rents could stimulate a more rapid sales recovery if banks get back into the business of lending to more creditworthy borrowers,” Yun says.

NAR points to the rising market share of all-cash purchases, an indicator of investor activity, as a sign that investors are beating out first-time buyers for foreclosures. The share of all-cash purchases was 30 percent in the second quarter, up from 25 percent in the second quarter of 2010. Investors, who make up the bulk of cash purchasers, accounted for 19 percent of second quarter transactions, up from 14 percent a year.

However, the credit noose seems to be affecting investors as well. To buy and hold distressed property, investors must have access to cash or mortgage financing. A recent HousingPulse survey indicated that after a year of absorbing distressed property supply, investor cash is getting depleted. That leaves first-time home buyers as the next group best able to absorb distressed property supply. But increasingly, first-time home buyers have trouble qualifying under strict mortgage underwriting guidelines.

NAR President Ron Phipps says the key to healthy housing is credit access. “It’s frustrating for many creditworthy potential home buyers to realize that when they’re ready to make a move, banks remain risk averse,” he says. “People with good jobs, long-term plans and who are willing to stay well within their means deserve an opportunity to realize their American dream of home ownership. When banks return to normal and safe but sensible lending standards, housing will be able to contribute its traditional share to economic growth.”

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