Young workers struggling to keep pace with home costs

Many young workers are finding that home prices are rising faster than their pay, making it harder for them to set aside the cash they need for the purchase, studies show.

The typical first-time buyer purchases a house that costs 2.6 times his or her annual income, according to a report released by Zillow this week. In the 1970s, buyers found homes that cost about 1.7 times their annual pay, the study found.

The shift means that people need bigger down payments to make the transition to home ownership. At the same time, they face obstacles such as student-loan bills and high rent and child-care costs that make it harder for them to save.

People have to strive for more expensive homes today than in the past because prices have appreciated while wages have stayed mostly flat, said Svenja Gudell, chief economist for Zillow. "We're seeing that first-time home buyers are renting for longer," Gudell said. "Homes are more expensive, so it takes them a while to get to that stage in their life."

The typical home purchased by first-time buyers cost a median $140,000 between 2010 and 2013, up from an inflation-adjusted $87,300 in the 1970s, the study found. Meanwhile, the median income for first-time buyers was $54,000 in 2013, about the same as it was in the 1970s when adjusted for inflation, Zillow found.

As a result, aspiring homeowners spend more time renting while they save up for the big purchase. They rent for six years on average before buying their first home -- more than double the time spent renting in the 1970s, the report found. The median age for first-time home buyers is also up from the 1970s, to 33 from 30. Home buyers today are also less likely to be married.

In the meantime, rents are rising, making it harder for people to save for a down payment. About half of all renters spent more than 30 percent of their income on housing in 2013, according to a report from the Harvard Joint Center for Housing Studies. About 11 million of those households used more than half of their pay to cover housing costs, the study found.

Once people have enough cash saved for a down payment, they're having a hard time finding a house they can afford, Gudell said. Many of the cheapest homes that were available in the early years of the recovery were taken off the market by investors and converted into rental units. Many millennials with steady jobs also tend to live in larger cities, where homes are typically more expensive, Gudell said.

Another way that rising home prices are hurting first-time buyers: Some owners who would usually be ready to upgrade to a bigger home are holding off from selling, hoping that their property will appreciate more, Gudell said. That's limiting the number of homes up for sale.

But putting off buying until they have more savings may be a smart call for millennials, said Bill Emmons, senior economic adviser at the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. Since many millennials entered the workforce with more student-loan debt than their parents and grandparents, taking the time to build investments outside of their homes could set them up for more financial stability, he said.