NEW YORK ( TheStreet) -- The housing market has been on fire for the last several months but don't tell that to a first-time homebuyer. Many young couples in their 20s and 30s who want to buy a home are struggling to get a mortgage under tough credit conditions. Others find themselves fighting a losing battle with cash-rich investors over low-priced homes. To make things worse, a sudden rise in interest rates coupled with rising home prices has now also made buying a home a lot more expensive. First-time homebuyers accounted for just 29% of home purchases in June, according to the National Association of Realtors (NAR), down from 32% a year ago. Historically, their participation rate has been close to 40%. Rather, the housing recovery has been chiefly driven by investors. Cash sales accounted for 31% of all sales in June, according to NAR, with individual investors accounting for 17% of all purchases. Investor participation has been higher than normal in this recovery, thanks to a large number of distressed properties hitting the market. Investors are usually attracted to these kinds of homes, as they can buy them at a steep discounts, fix them up and sell them for a profit or rent them out for an attractive yield. Investors have helped absorb much of the excess supply in the market and have helped lift housing off the bottom. But the low participation of first-time homebuyers has raised concerns about the sustainability of the housing recovery. First-time homebuyers are viewed as fundamental to the health of the housing market. Their demand allows existing homeowners to "trade up," thus fueling greater housing turnover. Plus, investors will exit as prices rise and returns diminish. What happens then? Will first-time homebuyers step up to fill the void? Or will flat incomes, an uncertain economic outlook and higher interest rates deter them? Bank of America Merrill Lynch economist Michelle Meyer said she believes that the share of first-time homebuyers will go up as the housing market normalizes over time. As the pipeline of distressed properties decreases -- the share of distressed sales was at its lowest level since October 2008 in June -- the economics for investors will become less attractive, she told TheStreet. There will be fewer bargains. Higher interest rates will also increase financing costs and other investments will start to look more attractive in a higher rate environment.
In other words, investor interest will decline and home prices will moderate, offering an entry point for buyers. Significantly, as the market starts to resemble a more "normal" one, lenders also will become more comfortable with credit, said Meyer. Credit will certainly not ease up as much as it did in the bubble days or even in the late 1990s. Indeed, Meyer said she expects homeownership rates to drop to 63% from 65% currently in a new normal housing environment. "Lessons have been learned from the housing crisis. A normal housing market will not mean returning to a bubble," she said. "A normal housing market will be one where credit is not as available, homeownership is lower, but housing turnover picks up and homebuyers participate." Right now, home prices are rising as strong demand from investors and buyers are outpacing supply. Meyer forecasts home prices to rise by a solid 11.8% in 2013 and by another 6.5% in 2014 before petering out in 2015 and 2016. Although home prices will moderate in the future, buyer sentiment will remain positive so long as prices go up, she said. In fact, the slowdown in the pace of recovery might help reassure buyers that this isn't a "bubble," Meyer said. To be sure, confidence in the housing recovery remains an important factor for first-time homebuyers. Trulia chief economist Jed Kolko noted that there are nearly 2.4 million "missing households" -- people who should be renting or buying but instead choose to live with parents or under the roof of someone else, a sign that confidence about the economy is still low. "Not only are young people not buying homes; they're not even renting," Kolko wrote in a post. "Household formation is the most important indicator of the housing recovery that ISN'T making great strides," said Kolko. Still, on the plus side, the missing households represent huge "pent-up demand" that could be unleashed once the economy improves. Kolko also expects some loosening in credit over time as mortgage regulations, scheduled to go into effect in January 2014, bring greater clarity to the industry.
Additionally, "higher mortgage rates would also reduce refinancing activity. Some have speculated that this could encourage banks to make more credit available to borrowers, " Kolko told TheStreet. So there is hope for first-time homebuyers. But the bottom-line is this: If you are a first-time homebuyer, it is not your turn yet. You might have to wait for the right conditions to set in before entering the market, even if it means you miss out on the easy returns from the housing rebound. -- Written by Shanthi Bharatwaj in New York. >Contact by Email. Follow @shavenk