Correction: An earlier version of this article incorrectly said that the percentage of all homeowners who are 25 to 29 years old decreased from 2007 to 2013. In fact, the percentage of 25-to-29-year-olds who are homeowners dropped. This version has been corrected.

Although the return of stability to the housing market has helped lift many underwater homeowners back into positive home equity and encouraged other owners to move up to larger or more costly homes, the recovery lacks the robust participation of one important group: young first-time buyers. ¶According to the Census Bureau, the share of householders 25 to 29 who owned their homes dropped to 34.1 percent in 2013 from 40.6 percent in 2007. It’s tough to come by reliable data on first-time home buyers, but real estate and mortgage experts say they are seeing fewer in the marketplace. ¶ “There are multiple reasons for the lack of participation in the housing market by first-time buyers and, unfortunately, I don’t think the situation is likely to change in the near future,” said Rick Sharga, executive vice president of Auction.com. “The main culprit is that the age cohort of first-time buyers, who are normally 25 to 35, was hit the hardest by the recession. Unemployment is still high among that age group and the jobs they do have are often at low wages or are even part-time.”

Jason Furman, chairman of the Council of Economic Advisers, said at a recent Zillow forum that the unemployment rate among millennials, generally identified as those born between 1980 and 1995, reached a peak of 14 percent in 2010. However, the unemployment rate in this age group now is 9 percent, still higher than other age groups.

Employment is not the only reason millennials are avoiding homeownership, however. Other factors such as tougher loan standards, student loan debt and a lack of affordable homes are having an impact. Researchers also are looking into whether a long-term attitude shift away from homeownership is occurring or whether millennials are simply delaying buying a home along with waiting longer to get married and start a family.

Why there are fewer first-timers

“One of the biggest issues keeping first-time buyers out of the market is the difficulty in obtaining a mortgage,” says Anthony Hsieh, founder, chairman and chief executive of LoanDepot.com. “More than 90 percent of all loans today have support from the federal government, compared to 40 percent of all loans in 2003. This means that there’s a lack of creativity and a lack of selection of loan programs that could help first-time buyers.”

Hsieh points out that the average credit score for approved loans has risen above 750 for loans guaranteed by Fannie Mae and Freddie Mac. In the early 2000s, a credit score of 700 was enough to earn the lowest interest rates and fees; now that credit score is barely acceptable.

“The primary reason that first-time buyers aren’t participating in the housing recovery is tight underwriting standards for home loans,” says Lawrence Yun, chief economist for NAR. “FHA loans were traditionally available to help renters buy homes, but the FHA has drastically raised the mortgage insurance premiums on these loans so they’re less affordable.”

Hsieh says that FHA insurance premiums were raised as a result of problems with borrowers defaulting on loans, but that new buyers are paying the price for those mistakes.

“The pendulum has shifted from fast-and-loose to too-tight mortgage lending standards, and at the same time the economy is not conducive for young renters to become buyers,” says Nela Richardson, chief economist for Redfin.com. “Labor force participation among young people is lower than normal and even those that are working are hurt because median income has stagnated while prices have risen.”

Another issue that works as a double-edged sword for buyers is higher rents. According to research by Zillow, renters during the first quarter of 2014 spent 30 percent of their incomes on rent. In many high-cost cities, that number is higher.

“While higher rents are an incentive to buy, renters also have a harder time saving up for a down payment,” says Stan Humphries, chief economist for Zillow.

Student loan debt is also holding back potential buyers because repayment of that debt sometimes precludes saving money to buy a home.

“People with student loan debt are much less likely to become buyers, in part because of the [federal government’s] new ability-to-repay regulations that set a hard cap on borrowers’ debt-to-income ratio at 43 percent,” Sharga says. “Young adults with relatively low wages and high levels of student loan debt won’t qualify for a loan.”

It used to be that having a student loan meant you were more likely to buy a home because it meant you had a college degree and therefore a higher income, but now having a student loan reduces the likelihood of becoming a homeowner, Richardson says. The impact of the debt depends a lot on the size of the loan.

Many first-time buyers turn to FHA loans because of the low down-payment requirement of just 3.5 percent, but Hsieh says that the higher mortgage insurance premiums and low maximum loan amount in many areas make these loans less appealing to many borrowers. However, conventional loans are harder to qualify for and typically require a down payment of at least 5 percent. The median sales price in the D.C. region in July was $530,000. A minimum down payment of $18,550 would be required for an FHA loan or a minimum down payment of $26,500 would be required for a conventional loan. In addition, buyers need cash for closing costs and emergency reserves.

Even those borrowers who do have the income, assets and credit to qualify for a loan will find headwinds on the supply side, because fewer homes are available on the lower end of the market.

“Inventory for the lowest-priced homes has decreased while prices have increased,” Richardson says. “At the same time, there’s more competition with cash buyers, both individuals and investors, for less expensive homes. The whole notion of a first-time buyer purchasing a fixer-upper and using sweat equity to build up an asset is pretty much gone because these buyers can’t compete with all-cash offers.”

According to research by Redfin, inventory in the bottom three quintiles is significantly lower in 2014 compared with 2009. In addition, the average price in the bottom quintile rose by 55.4 percent between June 2009 and June 2014, from $123,100 to $191,300, the highest jump by price category other than the highest-priced quintile, which experienced a 56.7 percent increase.

“Builders are still building very limited numbers of homes, so they need to make them bigger to make them more profitable,” Sharga says. “At the same time, they’re not seeing a lot of demand from first-time buyers. As the job situation improves, housing prices will normalize and the builders will start building more homes for first-time buyers, but it could be years before that happens.”

Social factors at play

Researchers say that the overall aspiration to become a homeowner appears to be in place, but that the purchase may be delayed. Yun points out that people are getting married and starting families later and staying in school longer to complete a graduate degree while they wait for the economy to improve, all of which delays buying a home. According to the U.S. Census Bureau, the median age for men to marry in 2013 was 29, up from 26.5 in 1993; for women, the median age for marriage was 26.5 in 2013 and 24.5 in 1993. Household formation rates, which dipped during the recession, are still below average.

Zillow’s Housing Confidence Index continues to show consumer aspiration for homeownership. In the most recent survey, 4 million people said they wanted to buy a home within the next year.

“While millennials marry later and have kids later, once they take those steps they look a lot like earlier generations,” Humphries says.

Another phenomenon that researchers say could be impacting millennials is the interest in a shared economy rather than an economy based on ownership.

“We’re watching this age group to see if we’re seeing a permanent change in behavior or a temporary one, but right now they’re showing a preference to use public transportation, bike-sharing services and car-sharing services like ZipCar and Uber instead of buying a car,” Richardson says. “They stream their movies or rent them instead of buying DVDs and they even use Pandora or Spotify instead of buying music.”

So far, however, researchers aren’t finding evidence that this translates to millennials never becoming homeowners, because in surveys they still express an interest in owning a home in the future.

“In my view, there’s not a fundamental shift in preference toward renting,” Furman says. “The decline in first-time buyers appears to be related to more mundane economic circumstances, but we can’t rule out entirely the possibility that this is a long-term shift until more time passes.”

Humphries considers the missing-first-time-buyer situation a bellwether of the housing market, a sign that the market still hasn’t returned to normal, rather than a long-term trend. He thinks it could be four to six years before distortions in the market from the housing crisis disappear, including the return of first-time buyers.

Says Sharga: “The first-time buyers prime the pump to get the process of people moving started and it hurts everyone’s opportunities if there aren’t enough first-time buyers. The impact isn’t major yet, but as the recovery continues this could be more of a problem that will have a direct effect on the overall economy, not just the housing market.”

While Yun is hopeful that slightly looser mortgage qualifications will bring more first-time buyers into the market, he is concerned about how long it could take.

“The housing recovery is less robust because millennials are not participating in the market,” he says. “Now that the worst of the housing crisis is over and prices are rising, homeowners and investors are able to take advantage of equity gains to move up or buy more homes, but millennials are not getting any equity at all. This may contribute to income inequality in the long term.”

Potential solutions

“Private lending must be part of the recovery at some point, but everyone is afraid to be the first to offer creative loans to first-time buyers,” Hsieh says. “There’s just too much scar tissue left over from the housing crisis. I’m not talking about subprime loans, but about offering something to first-time buyers such as loan program with a 10 percent down payment but with a more relaxed debt-to-income ratio, since these are buyers who are at the beginning of their careers and are likely to make more money in the future.”

NAR’s view is that regulations on home loan underwriting should be relaxed modestly along with rules about using gift money for down payments, Yun says.

“We agree that gift funds from outside groups or from builders who have an incentive is wrong, but gifts from family members who want to invest their savings in a home for their children should be treated as if it is the same as the buyer’s money,” he says.

In Virginia, the First-time Homebuyer Savings Plans program, which took effect in July, is designed to address the lack of down payment money by allowing future owners to accumulate up to $50,000 in cash, investments or insurance policies that will be exempt from state taxes as long as they’re designated for homeownership costs.

“Anything that helps people prepare for homeownership is helpful, but it’s hard to see how large an impact this will have at least in the short term,” Yun says.

The FHA is piloting its Homeowners Armed With Knowledge (HAWK) program beginning Oct. 1, in which first-time borrowers who participate in housing counseling approved by the Department of Housing and Urban Development before they make an offer on a home as well as before and after settlement can get a reduction in their mortgage insurance premiums.

Hsieh says that although anything in the direction of making it easier for first-time buyers to qualify for and afford a loan is helpful, he thinks the changes are not coming fast enough.

“It could be very dangerous to have a lack of first-time buyers for five or six years because it could be even harder for them to buy in a few years when affordability is lower because prices have risen and interest rates are higher,” says Hsieh, who thinks the government should act quickly to encourage lenders to come up with creative solutions to the first-time-buyer problem. “If you can get a $7,500 tax rebate to buy an electric car, there should be some kind of incentive to focus on homeownership,” he says.

Not everyone agrees the government programs are the solution, though, and many real estate experts think the first-time-buyer problem will fade away on its own.

“The best solution is a growing economy,” Richardson says. “There’s only so much any program can do to encourage first-time buyers until the labor market improves and wages go up.”

Michele Lerner is a freelance writer.