The Eighth Edition of the First-Time Homebuyer Market Report
The housing market slowdown intensified in Q4, resulting in bigger declines in home sales, a larger increase in housing inventory and supply, lower growth in new single-family home construction, and slower home price growth. This quarter’s report shows that, while not immune to the slowdown, the first-time homebuyer market continues to outperform the broader market.
Here are a few takeaways:
- The first-time homebuyer market has been more resilient during the slowdown compared to repeat buyers.
First-time homebuyers continued to be very active in the housing market. In fact, 482,000 first-time homebuyers purchased homes in Q4. While this was down three percent from a year ago, the first-time homebuyer market outperformed the repeat buyer market, which declined by seven percent year-over-year. This is a reminder that first-time homebuyers differ from other buyer groups in terms of why they buy – their purchase decisions are more likely driven by the fact that many are starting families and reaching peak home buying ages. Even when they face common challenges such as falling affordability, first-time homebuyers and repeat buyers may respond differently, as demonstrated by first-time homebuyers’ outperformance.The faster growth rate enjoyed by the first-time homebuyer market means that its importance in the housing market continues to grow. First-time homebuyers accounted for 56 percent of purchase borrowers for the mortgage industry in the fourth quarter; and 39 percent of homebuyers for the home sale market.
- The housing market slowdown was driven by rapidly falling affordability, which resulted from rising interest rates and rising home prices.
Housing affordability deteriorated further in Q4. The combination of higher home prices and higher interest rates means that buying the same house costs 17 percent more in Q4 than it did one year ago. Across the U.S. economy, the average worker is currently experiencing wage growth of just three percent, which is not enough to offset the increase in housing costs. This affordability challenge has resulted in a slowdown in the housing market. Some potential homebuyers have put off buying, while others are looking at lower-priced homes. The slowdown has resulted in a slower rate of growth in home prices in the past three quarters and shifted the sales of homes sold to lower-priced homes.However, interest rates have fallen since the middle of December 2018 as the Federal Reserve signaled fewer rate hikes into 2019, so homebuyers who close in Q1 should start to benefit from lower interest rates and a market condition more favorable to potential homebuyers. The slowdown in the housing market in the second half of 2018 highlights the importance of affordability to the housing market.
- Falling affordability is shifting more sales to lower-priced homes.
The resilience in the first-time homebuyer market is not the same as indifference. First-time homebuyers are still concerned about the rapidly rising cost of buying a home. This point is illustrated by lower prices paid by about 80 percent of all homebuyers and 70 percent of first-time homebuyers during Q4 compared to a year ago. During Q3, only about 20 percent of all homebuyers and 10 percent of first-time homebuyers paid lower prices compared to a year ago, and they were concentrated at the top-end of the home price distribution. Lower demand and higher costs have made affordability a bigger issue for homebuyers in Q4. This trend is similar to the trend during the 2013-14 “Taper-Tantrum” period. It is uncertain when the current slowdown will be over, but changes in the home prices buyers pay will be an important indicator for the trend in the housing market.
- The housing slowdown spread to 35 states in Q4, where affordability and other challenges are more severe for first-time homebuyers.
The first-time homebuyer market is a good barometer for comparing the attractiveness of different states to homeowners, because it depends on the abundance of economic opportunity and the availability of affordable homes. Worsening affordability resulted in 35 states with fewer first-time homebuyers in Q4 versus 19 states in Q3. Many of the worst-performing markets were located within states with worse-than-average affordability, including California, Washington D.C., Hawaii, New Jersey, New York, and Oregon.
- First-Time Homebuyer Market in 2018
The first-time homebuyer market remained strong in 2018 with 2.07 million purchases, above the level before the Housing Crisis. Since 2014, the market has grown by 40 percent, accounting for almost all of the growth in home sales during this period. That means most of the new opportunities created in the housing industry have come from the rise of first-time homebuyers, and first-time homebuyers have become more important to the housing industry. The private mortgage insurance industry has been an enormous benefit to first-time homebuyer market, helping to make conventional mortgages with low down payment the most popular mortgage product for first-time homebuyers. In 2018, private mortgage insurers provided capital for 682,000 first-time homebuyers. The boom in the first-time homebuyer market has also reshaped the demographics of many states by shifting homeowner population out of states such as California, Illinois, Massachusetts, Michigan, Louisiana, New York, and Texas, and into states such as Arizona, Florida, Georgia, Delaware, Idaho, and Nevada. While these first-time homebuyers have already created large opportunities in the housing market, they will create more opportunities over their lifetime as repeat buyers, borrowers who re-finance, and homeowners who remodel.
In the second half of 2018, worsening affordability replaced supply concern as the most important challenge facing the first-time homebuyer market. Amid the intensifying slowdown in the fourth quarter, the first-time homebuyer market decreased by three percent, outperforming the rest of the housing market. While the affordability concern is most acute in states such as California, New York, New Jersey, and Washington D.C., it is widespread enough that 35 states reported lower home sales to first-time homebuyers in Q4. Changes in sales mix toward lower-priced homes also appeared more widespread this quarter as homebuyers looked for more affordable options and a slower market allowed remaining buyers to pay less. Lower interest rates and slower growth in home prices, if sustained, will likely ease the affordability concern in the near term, and may provide a foundation for recovery, but the timing for a recovery is uncertain. Looking at the full year and the longer term for the first-time homebuyer market provides more reason for optimism. There remains a large number of “missing” first-time homebuyers who have not returned to the market in the aftermath of the housing crisis, and many young people are reaching their peak homebuying ages now, leaving them poised to buy over the coming years.
Opinions, analyses, estimates, forecasts, and other views included in these materials are those of Tian Liu, are based on current market conditions and are subject to change without notice, do not necessarily represent the views of Genworth or its management, and should not be construed as indicating Genworth’s business prospects or expected results. Neither Tian Liu nor Genworth guarantees that the information provided in these materials is accurate, current, or suitable for any particular purpose. Forward looking statements should not be considered as guarantees or predictions of future events.