Jade Rabino is paying top dollar to rent in Northern Virginia. She just had a baby, and while that is the No. 1 reason for renters to become first-time homebuyers, she is still waiting.
"I think it's just financial mostly, that's what I feel like. Around here the square footage that you get for the amount of money that you put down is not great," said Rabino, a clinical psychologist.
The U.S. economy is improving, employment is growing and home prices are recovering, but first-time homebuyers are not returning to their normal, historical levels of homeownership.
The share of these buyers, who are generally younger Americans, fell to the lowest level in nearly three decades—just 33 percent this year, down from 38 percent a year ago, according to an annual survey of homebuyers by the National Association of Realtors (NAR). The long-term average, dating back to 1981, shows that 4 out of 10 purchases are by first-time buyers.
"Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who've experienced limited job prospects and flat wage growth since entering the workforce," said Lawrence Yun, chief economist of the NAR. "Adding more bumps in the road is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums."
Nearly half of those surveyed by the NAR said the mortgage application and approval process was much more or somewhat more difficult than expected. A recent decision on forthcoming regulations governing mortgage lenders could help ease credit criteria slightly, but lending will not go back to the loose days of the last housing boom.
What is holding buyers back today is sticker shock. Home prices bounced off the bottom far more quickly than most had expected, thanks to heavy, all-cash investor interest. Prices rose considerably faster than income growth, and now that investors have slowed their purchases, mortgage-dependent buyers are not picking up the slack, even as rents continue to rise. Higher rents, in turn, are keeping some borrowers from saving for a down payment.
Financing is not, however, the only reason for the surge in renting. Younger Americans lived through the housing crash and many saw their parents' savings and home equity decimated. Renting now carries far less of a negative stigma than it did just a decade ago. Renting is now becoming more of a choice than a necessity.
"We are seeing a more mature renter, somebody to whom price is not a large decision-making factor, but we're also seeing the type of renter who just wants to live in an environment that feels much more like a neighborhood," said Stephanie Williams, a senior vice president at The Bozzuto Group in Washington, D.C.
Walking through a nearly finished development in the city's historic Cathedral Heights neighborhood, Williams said that while the majority of their renters are millennials, all millennials are not alike. They are hearing from young families as well as single renters. That is why the development includes larger townhomes for rent.
"In a neighborhood like this you will pay a premium for what you're getting, but the reality is what we see here in D.C. is that the renters can afford to do that. We have a fairly low rent-to-income ratio in the district, which is telling us people do have the income," added Williams.
High prices may be keeping some out of homeownership, but others are choosing to rent because of its inherent flexibility. Marcus Magwood is 30 years old and getting married next year. He is not looking to buy a home.
"Because I'm still undecided where I want to live," Magwood said.
—CNBC producer Stephanie Dhue contributed to this report.