First-time Homebuyer Market Report

First-Time Homebuyer Market Report 05.18

Genworth Releases Fifth 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 first quarter of 2018 (See Fact Sheet and Full Report).  This is our fifth report, and the only economic series focused on the size of the first-time homebuyer market.  It tells an important story about what is driving home sales and home price growth, as well as where supply is most needed.

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Here are some key takeaways from this quarter’s report:

    1. The first-time homebuyer market is no longer cyclically depressed; the period of rapid growth is over.

      Homes sold to first-time homebuyers declined year over year for the first time since the first quarter of 2014.  To see how far the first-time homebuyer market has recovered, compare these two quarters.  The number of first-time homebuyers is up 50 percent over four years.  Last year, 2.1 million homes were sold to first-time homebuyers.  In its 24 year history, only six years saw more first-time homebuyer purchase activity.  These facts suggest to us that the period of rapid catch-up growth is over, and we may see occasional pullbacks in first-time homebuyer activity.
    2. We expect the first-time homebuyer market to remain strong over the next few years, and to continue to account for a historically large share of housing and mortgage market transactions.

      We believe that there is a large number of potential first-time homebuyers ready to hit the housing market.  The first-time homebuyer market had been very depressed between 2007 and 2015.  Potential buyers deferred homeownership and some even reverted to staying with parents.  We estimate that 2.7 million potential first-time homebuyers remained on the sidelines at the end of 2017.  However, in the past three years, some of these potential buyers have decided that 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.  We believe that these factors will support the first-time homebuyer market over the next few years.
    3. 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 37 percent for home sales and 55 percent for home purchase loans.  We expect those numbers to remain elevated compared to the long-term average.  Mortgage lenders are often surprised that over half of the purchase loans are going to first-time homebuyers, and many do not have a strategy to reach those borrowers.  It is important to appreciate because this is the consumer group most reliant on mortgage financing.
    4. 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 first quarter of 2018, almost 81 percent of first-time homebuyers used some form of low down payment mortgage.  That is the highest since 2008.  We expect that trend to continue with the low down payment mortgage market growing with the first-time homebuyer market.  Understanding that this market is being driven by a resurgent first-time homebuyer market is an important concept.
    5. Conventional mortgages with private mortgage insurance are expected to become the leading source of mortgage 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 will likely benefit the most from this trend.  We expect that conventional mortgages with private mortgage insurance will replace FHA loans this year as the single largest provider of credit to first-time homebuyers.  That is because the three percent down payment loans made possible by the private mortgage insurance industry are gaining greater acceptance among lenders and borrowers.  Major players in the industry, including Genworth Mortgage Insurance, have announced lower premiums that will go into effect in the second half of this year and will lower the cost of borrowing.
    6. Tentative signs that growth of new home sales are moving to lower price ranges.

      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 28 percent since the end of 2013.  One area of the housing market that has seen limited response to the rise of the first-time homebuyer market is the new construction market.  Sales of new homes priced under $250,000 fell two percent in 2017, and were down six percent from 2013.  In the first quarter, new home sales growth picked up in the price range of $250,000 – $300,000 (up 17 percent from a year ago) and $300,000 – $400,000 (up 25 percent from a year ago).  Although these prices are still higher than what many first-time homebuyers can afford, growth is beginning to accelerate at lower prices than previous quarters.
    7. The number one challenge for housing policymakers is to encourage the expansion of the supply of affordable homes.

      This quarter, the housing market saw increased cash sales and purchase loans taken out by investors.  Offering to pay cash is a way for some homebuyers to beat out competing offers as multiple offers have become more common.  Investors and speculators are also becoming more aware of first-time homebuyer demand and the potential for greater price appreciation in that market segment.  We believe that the housing market will see expanded supply over the next few years, including increased new construction, lower vacancy rates, repair and remodeling of existing housing stock, and conversion of rental properties to owner-occupied properties.  Policymakers can play a constructive role in expanding the supply of affordable homes.

 

Miss a previous First-Time Homebuyer Market Report? Here are all four previous editions (First Edition, Second Edition, Third Edition, Fourth Edition)

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