First Rung on Property Ladder Gets Harder to Reach (Cont'd)

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By Noelle Knox, USA TODAY
The number of people who are moving in with friends or family, or sharing apartments or houses to save money, has caught economists at the Realtors association off-guard. The growth in "new households" -- first-time buyers or first-time renters -- has plunged 70 percent from last year's rate.
"This is very unusual," says Lawrence Yun, the NAR's senior economist. "Even during a recession, household formations do


By Noelle Knox, USA TODAY

The number of people who are moving in with friends or family, or sharing apartments or houses to save money, has caught economists at the Realtors association off-guard. The growth in "new households" -- first-time buyers or first-time renters -- has plunged 70 percent from last year's rate.

"This is very unusual," says Lawrence Yun, the NAR's senior economist. "Even during a recession, household formations do not slow to this current level."

Moving back in with his parents helped Chad Moskal pay off his bills and save some money. But he still felt compelled to cash out the $6,000 in his 401(k) retirement account to deliver his share of the $15,000 down payment -- plus part of the money they will need to fix up the $290,000 home they bought in Skokie, Ill., just outside Chicago.

"That's the kind of extreme measures it takes" for some first-time home buyers to enter the market, Paul Moskal says.

Tapping Retirement Accounts

Last year, about one in 10 first-time home buyers tapped their fledgling retirement or pension accounts to help come up with a down payment, according to the NAR. And that was back when mortgage companies seemed to be giving loans to anyone with a pulse.

"My mortgage broker wasn't accepting zero down," says Alfonso Rey, 32, who in February bought a one-bedroom, one-bath condo in San Francisco -- one of the nation's most-expensive markets -- for an eye-popping $714,000.

Rey and his wife had been outbid on 16 properties until they offered $62,000 more than the asking price for the condo -- and wrote to the owners, pleading with them to accept their offer so they wouldn't have to move out of the city.

To scrounge up a 5 percent down payment, Rey and his wife sold their cars and cashed out the entire $36,000 Rey had socked away in his 401(k). To keep their monthly payments low, they took out a loan that lets them pay only the interest for the first five years. They're taking a calculated risk, though, that the value of their condo will rise. With their interest-only loan, Rey and his wife will owe the same principal balance in five years. And their mortgage will reset, possibly to a higher interest rate.

Rey says his parents and friends told him he was crazy to use his retirement savings to buy a home. But Rey, who is halfway through an MBA program at the University of San Francisco, says he feared that if he didn't buy now, he would never be able to afford a home, because he expects real estate prices in San Francisco to continue rising.

Such desperate measures make financial planners cringe. Although you can withdraw up to $10,000 per IRA for a down payment on a first home without penalty from retirement accounts, you will pay taxes on the withdrawal (unless it's a Roth IRA you've had for five years) and you'll be switching your investment from stocks or bonds to real estate.

"You're wiping out your retirement, and if that's the only money you have for a home, maybe you shouldn't be buying a home," says Ed Slott, an accountant and IRA expert in Rockville Centre, N.Y. And after that money is gone, "What if the roof leaks, then what are you going to do? This is just the beginning" of the expenses of owning a home.

There are still some 100 percent loan programs available for people with good credit, few debts and solid jobs.

Rhonda Woods, a 23-year-old factory worker, obtained a no-down payment loan through Freddie Mac last month to buy her first home in Battle Creek, Mich. She bought it with her fiancé but says, "Everything's in my name because I have a little better credit."

Such federally sponsored programs from Freddie Mac and its sister organization, Fannie Mae, have income limits and a maximum loan ceiling of $417,000. That's not enough for some buyers in the most expensive markets. And last month, Fannie Mae raised the cost and lending criteria for its no-down payment mortgages.

The Federal Housing Administration, which caters to low-income and first-time buyers, also offers a 3 percent down payment loan. But loan limits make it less effective in many high-cost cities. The agency also plans to close a loophole that lets sellers help buyers with the down payment.

So in the end, some first-time buyers give up and move to a lower-cost city, sometimes in another state.

Looking Elsewhere

Corporate consultant Christa Schlaudecker, 28, says eye-popping home prices were one of the reasons she left Washington, D.C., last year for Cincinnati. Two weeks ago, she moved into her first condo, which she bought the old-fashioned way: with a 20% down payment, saved a little at a time, out of each paycheck. "I don't think I would have been able to (buy a home) any time soon in D.C. without taking on more debt, or a risky loan," Schlaudecker says. "If I would have bought something in D.C., I probably would have needed my parents' help."

Meanwhile, Hudson, who will complete his contract in Iraq in early 2008, says he won't be able to afford to buy that house with a swimming pool in his hometown of Milford, N.H. He says his $250,000 price target would buy him "a shack or a very nice condo" there.

So on vacation this month, he flew to Houston to look at properties and get a feel for the market. He says he plans to buy a home in December or January, by which time he should have saved up a sizable down payment. "By the time I come back from Iraq," he says, he might not even need a loan. "I plan to have it paid off."

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Copyright 2007 USA TODAY, a division of Gannett Co. Inc.

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