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Looking to buy? Best cities for first-time home buyers

In the rush to get in on the bargains of the housing crash, first-time home buyers were largely left out. Investors swarmed the most distressed markets, spreading their cash like fertilizer and pushing home prices up far faster than most expected. In less distressed markets, first-time buyers were still hampered, as the pendulum swung hard from loose lending to too-tight credit.

Now, as the spring season brings more listings to the national market and as investors seem to be pulling back a bit, first-time buyers are testing the water again. Some markets, like San Francisco, will likely be cost-prohibitive, while others, like Philadelphia, could offer easier entry to home ownership.

"First-time home buyers were put at a disadvantage against all-cash buyers, but with interest rates still staying low, with the marketplaces having risen fairly decently, you're seeing the opportunity where it's less of an investment for investors but a good opportunity for first-time home buyers," said Steve Berkowitz, CEO of Move Inc. operator of Realtor.com.

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Realtor.com ranked the top 10 markets for first-time buyers, using five factors to judge the best: market popularity, prices, inventory, time on market and employment. Pittsburgh, Tampa, Fla., and Philadelphia, ranked highest, mostly because their prices have not spiked much and their unemployment rates are lower than the national average.

Interestingly, Phoenix also made the top 10. Phoenix was one of the hardest hit housing markets during the crash, with prices literally falling by more than half from peak to trough. Investors targeted the market early, buying thousands of distressed properties at deep discounts and driving prices up by double-digits very quickly. Still, Berkowitz said it's a great place for first-time buyers now.

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"Investors are looking for a certain level of return," he said, and they're not getting it in Phoenix anymore. Large-scale investors have moved on to other markets, like Atlanta and Chicago, where discounts are better.

Top 10 Markets for First-Time Home Buyers by Rank

MSA
Median
Listing
Price
YOY %
Change
Total
Listings
Median
Age of
Inventory
Un-
employment
rate
1. Pittsburgh, PA $135,000 0.00% 11,026 128 5.70%
2. Tampa-St.
Petersburg-
Clearwater, FL
$169,900 13.34% 21,062 88 5.90%
3. Philadelphia,
PA-NJ(NJ)
$174,900 0.00% 10,656 141 6.40%
4. Fort Worth-
Arlington, TX
$175,000 3.61% 8,433 67 5.40%
5. Orlando, FL $191,900 12.95% 13,425 81 5.50%
6. Jacksonville, FL $198,000 1.59% 9,787 95 5.60%
7. Philadelphia,
PA-NJ(PA)
$219,000 1.86% 21,909 121 6.40%
8. Dallas, TX $224,900 12.45% 15,887 57 5.40%
9. Raleigh-Durham-
Chapel Hill, NC
$227,500 5.81% 9,435 98 4.90%
10. Phoenix-
Mesa, AZ
$244,900 13.96% 23,654 59 6.20%
Source: Realtor.com

Texas metro markets also ranked high for first-time buyers, even though those markets are very hot right now, and home prices are rising at a faster pace than the national average. The positives for markets like Houston and Dallas are that there is strong employment growth and plenty of buildable land. New construction would be an opportunity for first-time buyers, whereas the premium would be much higher in states like California, where there is little space to increase supply.

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While first-timers have been sitting on the sidelines so far in this recovery, their demand may be higher than anticipated. Employment growth has been weak among the younger cohorts, but first-time buyers are actually older now because they didn't buy during the crash years. That pent-up demand, once unleashed, could boost sales dramatically in some markets. That is crucial right now, as home sales having been falling since the start of last summer, when mortgage rates jumped.

"With private equity reducing the pace of their purchases, the first-time home buyer is needed in a greater way in order to see a substantive pickup in home buying," said Peter Boockvar of the Lindsey Group. "They however still face a strict lending environment, modest income growth, high student debt, higher prices and mortgage rates and a new-found desire to rent. This will explain why the housing recovery, while likely ongoing as households are still being created, will be much more moderate than hoped, for now."

Of course roadblocks still loom, like tight credit and weak confidence. The hope among builders and sellers is that rising rents and the prospect of higher mortgage rates next year will push first-timers off the fence and into home ownership.

—By CNBC's Diana Olick.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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