Michael Muller and Briana Sodaro, shown at their home in Dickinson, Texas, took steps to improve their credit score to qualify for a mortgage. Eric Kayne for The Wall Street Journal


Economists, real-estate agents and many home builders expected first-time and entry-level buyers to begin returning to the market this year, jump-starting the sputtering housing recovery. So far, that hasn't happened.

Less buying at the market's lower end by first-time buyers has contributed to limiting sales of existing homes so far this year to a pace of roughly 88% of their 10-year average. It's also a factor in stunting sales of newly built homes to a pace of roughly 60% of their annual average since 2000.
Some economists now predict that tight lending standards, high prices and the sluggish economic recovery will keep first-timers from returning in full force for several years. That likely means a slower pace for the housing recovery, already a drag on the broader economy in the past year.

"We likely have hit the bottom in the past six months or so regarding the lack of participation of first-time buyers," said Lawrence Yun, chief economist for the National Association of Realtors. "It may take three years to return to normal first-time-buyer participation."

On Friday, the U.S. Census Bureau reported that sales of new homes in April amounted to a seasonally adjusted annual pace of 433,000, down 4.2% from a year earlier though up month over month. In the market for previously owned homes, sales in April registered a 6.8% decline from a year earlier though they also were up month over month, the National Association of Realtors reported Thursday.

Michael Muller and his wife, Briana Sodaro, bought their first home in April, paying $140,000 for a newly built, three-bedroom house in the Houston suburb of Dickinson, Texas. But it wasn't easy, and the process underscores how stricter mortgage-qualification standards since the downturn are hindering younger buyers with limited money for down payments and less-than-pristine credit histories.




Mr. Muller, a 27-year-old industrial mechanic, and Ms. Sodaro, a 25-year-old receptionist, went through six months of credit counseling commissioned by their builder, CastleRock Communities LP, to bolster their credit scores so they could qualify for a mortgage. The couple did so by paying down credit-card balances and resolving disputed debts.

"I knew it was going to be a long process, considering that my credit didn't meet [lender standards]," Mr. Muller said. "But we feel like we came out on top."

Loan-qualification hurdles also tripped up Wendel and Leah Walker, a 32-year-old auditor and 31-year-old child-development specialist looking for a three-bedroom house in the range of $160,000 to $180,000 in or around the Dallas suburb of Frisco, Texas.

The Walkers, who rent an apartment in Frisco, were close to purchasing their first home in April when a lender asked for more documentation related to their down payment and asked that Ms. Walker defer payments on her $60,000 of student loans for a year. The Walkers declined, and they're now working to polish their credit histories and perhaps defer her loans in preparation for restarting their home search this summer.

"It's a bit frustrating, time-consuming, overwhelming," Mr. Walker said. "To get to that point in the loan process, and then you get bombarded with other requests for more financial documents and statements."

Myriad other factors have dogged first-time buyers in recent years. According to Census data, Americans from 25 to 34 years of age experienced the biggest decline in income9%—of any age group from 2007 to 2012 other than people younger than 25. Many also are grappling with student debt that crimps their cash flow.

What's more, there are fewer affordable homes available for first-timers to purchase. Nationally, the median price of an existing home has increased by 5.2% in the past year to $201,700. The median price of a newly built home registered $275,800 in April, down 1% from a year earlier.

Indeed, for 27-year-old casino dealer Charity Brown, the trouble isn't the ability to get financing but high prices. Ms. Brown says she has been approved for a loan of $165,000 as she looks in the Denver area to buy her first home.

"Everything that I like is over my price range right now," she said. "A lot of places are about $20,000 to $30,000 more than I can afford."


The surest route to normalcy for the housing market is for first-time and entry-level buyers to rebound, economists say.

First-time buyers now account for about 16% of new-home purchases, down from a range of 25% to 28% between 2001 and 2007, according to the National Association of Home Builders. In the existing-home market, first-timers accounted for 29% of purchases in April, according to the Realtors association. That's down from their monthly share exceeding 40%, and occasionally surpassing 50%, in 2009 and 2010 when a federal tax credit for first-time buyers was offered.

But hopes for a meaningful rebound in the entry-level arena this year have dimmed, and the lull has implications for the U.S. economy. Fewer home sales mean less spending to install furniture and fixtures in homes, fewer mortgage originations and fewer construction workers employed to build and renovate houses. Home construction accounted for 3% of U.S. gross domestic product in this year's first quarter, down from an average of 5.5% in the period from 1999 to 2005, according to the home-builder association.

Michael Muller and Briana Sodaro at their home in Dickinson, Texas. Eric Kayne for The Wall Street Journal


The dynamics could stunt the entry-level market and broader economy for years to come. Economists believe younger Americans now are much more likely to rent for longer periods than did earlier generationsdue not only to the rising home prices and high credit standards but also the high student debt levels and elevated levels of underemployment.

Mark Zandi, chief economist at Moody's Analytics, expects a "slow build" in first-time and entry-level home purchases starting this year. But "there are several headwinds," he said, pointing to elevated levels of unemployment among younger workers and high levels of student-loan debt. "They've had a tough financial time.…I'm sure they're psychologically scarred by the economic roller-coaster of the last 10 years."

On the bright side, housing-market observers note that U.S. job growth is improving, mortgage-lending standards are loosening ever so slightly and many young adults likely are getting weary of living with roommates or their parents.

Barclays housing analyst Stephen Kim wrote in a May report that the U.S. will get back to its boomtime employment peak of more than 138 million jobs in the private and public sectors by this summer. "At that point," he wrote, "every job created will represent a job that the economy has previously never had before, and therefore, should translate into greater household formation than we have seen in recent years."