The rising burden of student debt doesn’t explain the weakness in home sales to first-time buyers, so the question arises what is holding this segment back?

Capital Economics says that some of the cyclical factors holding back demand have eased, and despite the conventional wisdom, there is no evidence to suggest that homeownership aspirations amongst young households have diminished in recent years.

“This suggests that factors such as credit scoring and risk aversion amongst lenders may be mostly to blame for the weakness in home sales to first-time buyers,” says chief property economist Ed Stansfield. 

Stansfield and his analysts re-examined the issue, and in a client note explain how they took it back to basics.

“One possibility is that young people nowadays simply have less desire to own a home. This could reflect the increasing geographical mobility required in modern careers, the fact that they have lived through the biggest housing crash on record, or because renting is seen as more affordable. Our calculations suggest housing is now slightly overvalued compared to rents,” he says. “Nonetheless, there doesn’t appear to have been a fundamental shift in homeownership aspirations. The most recent survey data suggest that nine out of ten people still see homeownership as a key part of the American dream.” 

Furthermore, they found, there is no evidence to suggest that young households should have particular difficulty in affording a home.

Historically, first-time buyers tend to be in their early 30s and the unemployment rate for 25-34 year olds has fallen sharply in recent years to just 5.6% in March, in line with the national rate.

As so often, it comes down to access to credit.

“…[I]t seems more likely that potential first-time buyers are being especially constrained by continued difficulties in obtaining credit,” he writes. “(They) are generally reliant on mortgage financing, but many will have little or no credit history and the means to make only small down payments on a home.” 

The good news may be found in the Fed’s latest Senior Loan Officer Survey.

According to the April 2015 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve, over the past three months, nearly 20% of banks said that credit standards for approving applications on GSE-eligible residential mortgages eased somewhat.

“That said, the average FICO credit score of successful mortgage applicants has ticked up in recent months and, at 731, it is above the average score of 697. But the Fed survey also showed that attitudes to borrowers with below-average scores are starting to improve marginally,” Stansfield says. Since there is little evidence that home sales to FTBs are being impeded by a lack of demand, a continued gradual loosening in credit conditions over the next couple of years should encourage more young households to take the leap into homeownership.”