The ongoing housing market recovery has been supported in great part by real estate investors, luxury home buyers and speculators. Thanks to these buyers, median home prices across the United States reached a bottom after many years of hasty drops. Sellers in some regional markets are now enjoying multiple bids on their properties, and seasoned house hunters are showing their preference for new construction projects.

Conditions are seemingly promising for the housing recovery to continue, but one important factor concerns analysts: Not enough first-time home buyers.

An Unsustainable Recovery

Economic history shows that healthy real estate markets need a first-time home buyer participation rate of at least 40 percent in order to be sustainable. Recent data compiled by the Campbell/Inside Mortgage Finance Housing Pulse survey shows first-time home buyer participation at just 35 percent in October 2012. This rate is two percent lower than it was in June.

The housing market is heavily dependent on first-time home buyers since they are more likely to purchase existing homes. Seasoned buyers who wish to sell their homes and move into a newly built properties can easily get discouraged by the lack of offers. The longer homes sit around without receiving offers, the less likely they are to appreciate in value.

Squeezed-Out Home Buyers

First-time home buyers are not being shy, but they feel that they don’t have too many options or support. Credit and underwriting guidelines for mortgage lending have been very strict since 2008. Even the Federal Housing Administration (FHA), an entity often considered as a last resort for first-time home buyers, is planning on tightening its conditions for guaranteeing home loans.

First-time home buyers are also being squeezed by real estate investors gobbling up properties in places like Phoenix. Investors plan to increase their holdings in single-family homes to strengthen their positions during times of high rental demand. In these cases, first-time home buyers see prices go up faster than they can make an offer.

Potential Economic Recovery Eclipse

Economists and legislators are concerned that low participation by first-time home buyers could actually lead to an eventual reversal in home prices and a return to apathy.

Preventing an eclipse of the recovery is prompting some ideas in this regard, which include the creation of special tax-free saving accounts to build down payments and cash reserves. Credit standards are unlikely to relax at this point, and only cash may improve the mortgage prospects of buyers.

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