First-Time Homebuyer Purchase Rate Highest Since 2000
Originally published by: Glenworth Insurance — December 5, 2017
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A new report focuses on the number of homes sold to first-time homebuyers (see the fact sheet here). Using 21 million first-time homebuyer records from mortgage origination data, this report spans two housing cycles over the past 24 years.
There are four key takeaways from this quarter’s report:
- The first-time homebuyer market continues to grow, despite a slowdown in overall home sales.
- Purchase mortgages, especially those with less than a 20 percent down payment, continue to grow.
- The supply of new single-family homes priced under $250,000 is not growing.
- Low down payment mortgage loans for first-time homebuyers continue to expand, led by the private mortgage insurance industry.
What does the report tell us about the current housing cycle?
The first-time homebuyer market is growing much faster than other buyer segments in the housing market, thus defining the current housing cycle. This trend first emerged in 2015 and growth in the first-time homebuyer market has represented 85 percent of the growth in single-family home sales. This trend has continued into the third quarter. The sustained growth in the first-time homebuyer market means that not only has it recovered to its historical level, but that it is historically high in number and as a percentage of home sales. A strong economy with full employment for those in primary household formation ages (between 25 and 44), and historically low interest rates, has provided a firm economic foundation. The Millennials’ entry into the housing market, and the delayed purchase over the previous 10 years, also contributed to its rapid growth in the past two years.
The growing clout of first-time homebuyers has transformed the mortgage market. The number of homebuyers taking out mortgage financing is growing faster than repeat homebuyers across all mortgage segments – leading to an increase in the mix of first-time homebuyers. Low down payment mortgages, which help potential first-time homebuyers without much savings, are growing. The private mortgage insurance industry has helped to facilitate the rebound of the first-time buyer market and will likely become the largest source of credit enhancement for first-time homebuyers based on the current trajectory.
In the housing market, the growing presence of first-time homebuyers is beginning to show up in rising homeownership rates among younger households. They have a long way to go before getting back to their historical levels and differences among homebuyers matter to understanding the housing market. First-time homebuyers are buying their first home to get more value than just a financial return – that’s why they can outbid other buyers in their price range.
The large influx of first-time homebuyers is creating a unique challenge in the housing market. Unlike repeat buyers, first-time homebuyers do not have a home to buy and sell at the same time. Their presence is an important reason why housing inventory has been declining, while sales and price growth have been up. Compounding this challenge is that rising demand from potential first-time homebuyers has not been met by a large increase in affordable new homes. The potential demand for new single-family homes priced under $250,000—a price point chosen by many first-time homebuyers—is increasing by hundreds of thousands of units a year, but remains unmet. The mix of that price segment is, in fact, down compared to 2011. This disconnect between first-time homebuyer demand and supply means that home price gains will continue. While many forecasters are predicting a slower pace of home price growth, we see that as an unlikely scenario in 2018. In fact, our expectation that the conforming loan limit would rise to around $450,000 in 2018 was already fulfilled even before the release of this report. In addition to rising home prices, we also expect some potential homebuyers facing less urgency in making a buying decision to stay on the sidelines or pursue other options such as hiring contractors to upgrade. The pullback of repeat homebuyers this quarter shows that the supply shortage is hurting buyers and limiting the growth of the housing market.