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First-Time Homebuyers Risk Getting Squeezed Out of Market

NEW YORK ( TheStreet) -- Thinking about buying your first home? Well, get a move on -- in some markets the supply's dwindling.

That's the finding in research by Zillow (Z - Get Report), which runs the home-shopping site Zillow.com.

"First-time homebuyers are being squeezed out of the market by falling inventory and the rapid influx of investors looking to buy basic homes to rent out to the growing population of people who have recently been foreclosed upon," Zillow chief economist Stan Humphries says in a press release. "Investors are paying in cash and can close sooner, which is more favorable to banks and homeowners looking to sell."

California is the poster child for this problem, Zillow says, with the inventory of "bottom tier" homes dropping 42.7% in the 12 months ended Sept. 30. The bottom tier is the cheapest one-third of homes. In the middle and upper tiers, California's inventories have dropped 37.4% and 31.9%, respectively. Nationally, the bottom tier inventory has dropped 15.3%, the middle 18.6% and the upper 22%.

If you're thinking about buying your first home, don't panic, because there are still homes out there, prices aren't rising very fast, and not all markets are experiencing a severe decline in lower-cost homes.

The worst-hit are metro areas in Phoenix, with the bottom-tier inventory down 57.1%, Sacramento off 55.4% and San Francisco down 53.2%.

At the other end of the spectrum, bottom-tier inventory is down just 5.6% in Cincinnati, 6.5% in San Antonio and 7.1% in Philadelphia.

But Zillow's report is a wake-up call. Ever since the financial crisis hit in 2008, prospective homebuyers have been told, "Don't rush. It's a buyer's market. There will be plenty of homes in six months or a year and if you buy now you could lose money if prices drop further."

This doesn't seem to be the case anymore (http://www.bankingmyway.com/real-estate/2-more-signs-housing-market-is-healing). There's a growing consensus among housing-market experts that conditions are improving. It seems unlikely prices will plunge again, sales and prices are rising and conditions are likely to continue getting better as the economy improves and mortgage rates stay low (http://www.bankingmyway.com/real-estate/mortgages/odd-income-hurts-mortgage-applications).

The problem, according to Zillow, is that investors are spotting the trend and buying up the most economical homes to use as rentals. Traditionally, a newly bought rental property runs in the red for a number of years before rent increases can cover all the owner's costs. But today, because prices and mortgage rates are low and rents relatively high due to the oversupply of renters, investment properties can pay off much sooner.

So, for the first-time buyer -- and others, too -- the standard advice is changing: The chance to pick up a bargain now seem better than the risk of losing money in another dip. There may be fewer good buys in six months or a year.

If you want to move, it's not a bad time to do so, especially if you don't have to sell a home before you can buy one.

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