Genworth Releases Fourth Report Edition to Track the Entire First-Time Homebuyer Market
I am pleased to release Genworth Mortgage Insurance’s First-Time Homebuyer Market Report for the fourth quarter of 2017 (See Fact Sheet and Full Report). This is the only economic series focused on the size of the first-time homebuyer market, and it tells an important story about what is driving home sales and home price growth, as well as where supply is most needed. We also look back at 2017 to see how the first-time homebuyer market has evolved, and to understand where the housing market stands in the cycle.
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Here are some key takeaways from this quarter’s report:
- The first-time homebuyer market is no longer cyclically depressed; growth rate has moderated and will likely continue.
Housing is a cyclical market with many ups and downs. This is no different for the first-time homebuyer market segment. Looking back over the last 24 years, an average of 1.8 million first-time homebuyers per year purchase homes. Years 2007 through 2015 were a depressed era for the first-time homebuyer market, with below-average numbers reported. Potential buyers deferred homeownership, some even reverted to staying with parents. However, it has become clear in the past three years that some potential buyers have decided the wait is over. The millennial generation is starting to reach the age for starting families and buying homes. The strong job market, rising home prices, and historically low interest rates also provided favorable economic conditions for potential buyers. These are the main reasons for the sharp recovery in the first-time homebuyer market since 2014. As a result, almost 2.1 million first-time homebuyers purchased homes in 2017—300,000 more than the historical average. That is why we believe the first-time homebuyer market is no longer cyclically depressed. The implication is that the growth rate will be more moderate from this point on.
- First-time homebuyers will continue to maintain an outsized role in the housing market, as housing demand moves from rent to own.
The recovery of the first-time homebuyer market means that they command a larger presence in both the housing market and the mortgage market compared to their long-term average. Historically, 35 percent of home sales and 46 percent of home purchase loans went to first-time homebuyers. In 2017, those numbers were 38 percent for home sales and 56 percent for home purchase loans. We expect those numbers to remain elevated compared to the long-term average. While the growth since 2014 has been impressive, there remains a large number of potential first-time homebuyers on the sidelines and they will continue to enter the housing market in the coming years.
- The growth in the first-time homebuyer market means that low down payment mortgages will continue to be an important part of the mortgage market.
Down payment has always been the biggest hurdle facing potential first-time homebuyers. Low down payment mortgages allows these buyers to afford entry-level homes using a small amount of savings. In the past three years, 79 percent of first-time homebuyers have relied on low down payment mortgage products. We expect that trend to continue with the low down payment mortgage market growing with the first-time homebuyer market.
- Private mortgage insurance is expected to become the leading source of financing for first-time homebuyers as government lending programs step back.
While the growth in the first-time homebuyer market is expected to boost demand for low down payment mortgages, the private mortgage insurance industry should benefit the most from this trend. That is because the three percent down payment product offered by the private mortgage insurance industry is gaining greater acceptance among lenders and borrowers. In addition, government lending programs such as the FHA already have a very large presence in the market, and are stepping back as credit availability has improved.
- The repeat homebuyer market has not seen any growth since 2013. Instead of moving, homeowners are doing repairs and remodeling. This has removed one of the growth drivers for household mortgage debt.
The rapid growth in the first-time homebuyer market is a sharp contrast to the repeat homebuyer market, where sales have been stagnant since 2013. While the economic environment is just as favorable for repeat buyers, many have seen repairs and remodeling as a better choice to buying. The lack of growth in the repeat homebuyer market is a drag for both housing and the mortgage market.
- The supply of affordable new homes for first-time homebuyers is not growing, keeping inventory low and home price growth high in 2018.
The strong growth in the first-time homebuyer market between 2014 and 2017 has had a tremendous impact on the housing market. It contributed to over 80 percent of the growth in home sales during this period, which drove housing supply to the lowest level on record and pushed home prices up 26 percent since the end of 2013. One area of the housing market that has not responded to the rise of the first-time homebuyer market is the new construction market. Sales of new homes priced under $250,000 were down two percent in 2017, and down six percent from 2013. Growth in new home sales has concentrated in the price range above $250,000, which is less affordable to most first-time homebuyers. We believe that the lack of supply of new homes to first-time homebuyers will keep inventory low and home price growth high this year.
- We expect faster growth in disposable income to generate positive momentum for the first-time homebuyer market, but the rapid increase in interest rates will make housing less affordable.
What is ahead for the first-time homebuyer market in 2018? Our analysis of the new tax law suggests that it will provide a modest boost to after-tax income in most parts of the country. A tightening labor market is also beginning to translate into faster wage growth. These will likely create positive momentum for first-time homebuyers. However, the rapid increase in interest rates we have seen recently may make housing less affordable, and potentially slow down housing market activity.