(Bloomberg) — The challenges facing prospective buyers of theleast expensive homes in the U.S. are getting harder toovercome.

Already beset by stagnant wages, growing student debt andcompetition from investors who are snapping up listings, thoselooking to purchase moderately priced houses must also provide morecash up front. The median down payment for the cheapest 25% ofproperties sold in 2013 was $9,480 compared with $6,037 in 2007,the last year of the previous economic expansion, according to datafrom 25 of the largest metro areas compiled by brokerage firmRedfin Corp.

The higher bar is a symptom of still-tight credit that iscrowding out first-time buyers even as interest rates remain nearhistorical lows. Younger adults, who would normally be makinginitial forays into real estate, are among those most affected,weakening the foundations of the housing market and limiting itscontribution to economic growth.

“The numbers tell the story of why we have millions of potentialhomeowners who are renters or living with their parents,” saidSusan Wachter, a professor of real estate and finance at theUniversity of Pennsylvania's Wharton School in Philadelphia. “Whathas changed is the ability to become an owner. And that's changedthrough a down payment that's more than doubled.”

Down payment

The median down payment for the cheapest 25% of homes was 7.5%of the sales price last year, up from a low of 3.1% in 2006 andcompared with an average 4.2% from 2001 through 2007, according toSeattle-based Redfin. For properties in the middle 50%, the sharerose to 8.8% in 2013 from an average 8.2% in the seven yearsleading to the last recession, and for the top quarter it climbedto 20.9% from 19%.

One of the main reasons for the jump is that fewer first- timebuyers are applying for loans backed by the Federal HousingAdministration, which require smaller down payments, after thegovernment agency boosted mortgage-insurance premiums, said MalcolmHollensteiner, the director of retail lending products and servicesfor the U.S. unit of Canada's Toronto-Dominion Bank. FHA raised thecost of borrowing and tightened underwriting to cope with losses onmortgages it backed as the property bubble burst.

Borrowers must now pay an up-front fee of 1.75% of the loanbalance and up to 1.35 percentage points in annualmortgage-insurance premiums. A new program announced in May willhelp homebuyers who go through counseling lower their premiums.

FHA loans

Some of those borrowers may be going to private lenders thatdemand bigger down payments instead. In 2013, 39% of first-timebuyers used FHA loans, which generally require 3.5% down, comparedwith 56% in 2010, according to data from the National Associationof Realtors.

The affordability index for first-time buyers, which measuresthe ability of a family earning the median income to purchase amedian-priced home at current interest rates, declined to 105.7 inthe second quarter, the lowest since the final three months of2008, according to the NAR.

Banks have “become much tighter on credit, even ongovernment-backed mortgages,” said Dean Maki, chief U.S. economistat Barclays Plc in New York. This has made it “harder forfirst-time buyers and others with limited credit histories.”

Buy backs

Banks don't want to make loans to borrowers they consider to beriskier because they're worried about having to buy back the loans,said Mike Calhoun, president of the Center for Responsible Lending,a consumer group in Durham, North Carolina. And if they do givemortgages to borrowers who have lower credit scores, they'llrequire a larger down payment to offset that risk, he said.

Iris Garcia, 35, has seen firsthand how the bar has been raised.She and her husband hope to close next month on a $239,000four-bedroom “fixer-upper” on the north side of Chicago with theirfour children. The couple came up with 15% down to win the bid,after losing out on another property to an all-cash investor.

“A few years ago that would have been different,” Garcia said ofthe up-front payment. “Just with everything that's been going on inthe market, that was the safe way to go.”

To be sure, stricter lending, while crowding out marketparticipants, also might mean a healthier crop of homeowners andreduced probability of another crash, said Gary Rogers, an agentwith Re/Max Holdings Inc. in Waltham, Massachusetts, and a regionalvice president for the NAR. Putting more money down probably meansfewer owners will owe more than their properties are worth shouldprices drop.

Improved liquidity

“If there is a downturn, houses are still going to be moreliquid than they were before when people were buying with zero and3.5% down,” Rogers said. “The liquidity of housing is going to beimproved as time goes on because of this trend, and I think that'sa really great buffer.”

First-time purchasers accounted for 28% of all sales ofpreviously owned homes in June, compared with about 40%historically, NAR data show. A dearth of first-time buyers ispushing down the national homeownership rate, which fell in thesecond quarter to its lowest level since 1995, according to CensusBureau data.

The Redfin median down payment calculations don't includeall-cash purchases, which are mainly from investors looking to takeadvantage of the drop in prices at the bottom of the market to pickup rental properties. Those purchases made up 52% of lower-tiertransactions in 2013, compared with 23% for the middle 50% and 21%for the top quarter, the data show.

Economic impact

The economy won't get back to its pre-recession growth ratewithout more first-time homebuyers, whose entry helps boostconstruction and spending on durable goods such as furniture andappliances, said Wharton's Wachter.

Young adults in particular are probably having trouble coming upwith bigger down payments. Unemployment among 25- to 34-year-oldswas 6.6% in July, compared with 6.2% for all groups. The rate forthat subset averaged 5% in the four years leading to the lastrecession. Record levels of student debt are also making them lesslikely to take out a mortgage, according to research by the FederalReserve Bank of New York.

Buyers looking for less-expensive properties are also finding adearth of supply after investors swooped in, according to a Redfinanalysis. In contrast, listings have increased the middle marketand at the top, the data show.

Such obstacles, combined with the expectation of having to offermore cash up front, threaten to derail the younger generation fromentering the housing market, said Wachter.

“If higher down payments persist, we will have a Millennialgeneration that's missing in action in homeownership,” shesaid.