by Rick Roque

They are young, tech-savvy, debt-burdened, and cash-strapped. The entire American housing market economy depends on their participation, but the credit markets see them with apprehension. They are the elusive first-time home buyers; the missing, yet uncertain element in a full-blown recovery of the real estate market in the United States. 

A generally accepted assumption of real estate macroeconomics estimates that 40 percent of housing market participants must be first-time home buyers so that the market can be efficient and beneficial for the overall economy. In early 2013, U.S. News and World Report cited statistics that placed the percentage of first-time home buyers at just 35 percent. An updated article, however, puts that estimate closer to 40 percent.

Has the participation level of first-time home buyers really increased five percent in just a few months? Probably not. What is changing, however, is the profiling of these newcomers to the housing market. Real estate and marketing analytics firm Doorsteps recently issued new information on first-time home buyers and their reasons for approaching the housing market with caution.

The Young Millennials

Generation X made it through the dot-com bubble, the housing bubble and the Great Recession. Many of them were first, second and even third-time home buyers during the housing bonanza of the early 21st century. The time is nigh for Generation Y to take their turn as the great hope of the housing economy. 

Married couples and single females in their early 30s are the most likely candidates to buy their first home under current market conditions. Their average income is a respectable $62,800 per year, but many of them are saddled with about $30,000 in student loan debt. Only about 11 percent of single millennial males are in the market for a new home. 

It is clear that Generation Y cares about location, but young house hunters are not too crazy about long commutes. More than 15 percent are not willing to compromise when it comes to driving a long distance to get to work. It is important to remember that Generation X and Generation Y have both migrated from the suburbs in the last few years to be closer to urban centers that present work opportunities. 

Financing and Down Payment

Good news for mortgage lenders: Millennials are in the market for a mortgage. The bad news is that most do not qualify. The issues of Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) are still wild cards at this time for first-time home buyers. More than 76 percent of millennials expect to tap into savings when it comes to down payments, and they are willing to sacrifice vacations and entertainment expenses to accomplish this. 

Banks with heavy real estate-owned (REO) portfolios should also take note that only 35 percent of the new first-time home buyers will shun a foreclosed home. The great majority will consider purchasing distressed and REO properties.

Not part of this article is my own observation the Real Estate Investment Trust, Hedge Funds and small private investors are purchasing as much housing inventory as possible because this segment of the market will rent, if they can not buy at this time, rather than move in with mom and dad.

Hedge funds are private, actively managed investment funds. They invest in a diverse range of markets, investment instruments, and strategies and are subject to the regulatory restrictions of their country. U.S. regulations limit hedge fund participation to certain classes of accredited investors.

Hedge funds are often open-ended, and allow additions or withdrawals by their investors. A hedge fund's value is calculated as a share of the fund's net asset value, meaning that increases and decreases in the value of the fund's investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw.

Most hedge fund investment strategies aim to achieve a positive return on investment regardless of whether markets are rising or falling. Hedge fund managers typically invest money of their own in the fund they manage, which serves to align their own interests with those of the investors in the fund. A hedge fund typically pays its investment manager a management fee, which is a percentage of the assets of the fund, and a performance fee if the fund's net asset value increases during the year. Some hedge funds have a net asset value of several billion dollars. As of 2009, hedge funds represented 1.1% of the total funds and assets held by financial institutions. As of April 2012, the estimated size of the global hedge fund industry was US$2.13 trillion.

Because hedge funds are not sold to the general public or retail investors, the funds and their managers have historically been exempt from some of the regulation that governs other funds and investment managers with regard to how the fund may be structured and how strategies and techniques are employed. Regulations passed in the United States and Europe after the 2008 credit crisis were intended to increase government oversight of hedge funds and eliminate certain regulatory gaps.