Genworth Releases Sixth Report Edition to Track the Entire First-Time Homebuyer Market
Released August 28, the First-Time Homebuyer Market Report for the second quarter of 2018 marks the sixth edition and the only economic series that focuses on the entire first-time homebuyer market. Below, I will highlight a few trends discussed in my report, and answer some commonly asked questions about the housing market.
1. What explains the recent decrease in home sales in the housing data?
The housing market reported disappointing data for June. Compared to a year ago, new home sales grew by less than two percent, existing home sales were down five percent, and single-family housing starts were flat. Is the housing recovery still on track?
Despite favorable economic conditions, the housing market faces two challenges that contributed to the disappointing housing data for June. On the supply side, there is a lack of inventory in the existing homes market and no growth in new homes that are in high demand for first-time homebuyers. In the second quarter, housing inventory remained tight. It would take a large increase in inventory or a decline in sales to restore demand and supply balance. So, fewer home sales is part of the equation. On the demand side, rising interest rates compounded the cost of inflation facing homebuyers. Since late 2017, the costs of buying a home have increased by 11 percent. While it is difficult to predict when interest rates will increase, it is undeniable that the economy has entered a rising interest rate environment. Since 2013, there have been two episodes when higher interest rates combined with rising home prices led to significant increases in homebuyers’ monthly payments. These episodes, in 2013-14 and 2016-17, were followed by lower growth rates in home sales. However, after the initial slowdowns, first-time homebuyers eventually adjusted to the higher costs and achieved almost 40 percent growth between 2014 and 2017.
While low inventory and higher costs made it challenging for first-time homebuyers, it is remarkable that so many purchased homes in the first half of the year. In absolute numbers, 985,000 first-time homebuyers bought homes during the first half of 2018, the most since 2005. They continued to be very resilient and made up a large part of housing-related transactions.
2. Is the housing market in a bubble?
Following the Housing Crisis, home prices have seen a significant recovery. Based on the Federal Housing Finance Agency’s purchase-only index, home prices are 18 percent higher than they were at its previous peak in June 2007 and are only four percent below that peak after adjusting for inflation. This has prompted the question – are we in a housing bubble again? There is some debate as to whether home prices are over-valued, but asset bubbles have a more restrictive definition. They require a belief that home prices will continue to increase, which draws speculative buyers into the market. That is why it is important to look at the mix of homebuyers. Today, the first-time homebuyer market is around 30 percent larger than in 2007, while total home sales are similar. That means we have more first-time homebuyers living in the homes they have purchased and fewer speculators. More first-time homebuyers and fewer speculators mean that the housing market today is far more stable. Finally, between 2014 and 2017, first-time homebuyers accounted for around 80 percent of the growth in home sales, so the run-up in home prices has not been the result of speculative demand.
3. What mortgage market trends are being driven by first-time homebuyers?
Conventional loans with private mortgage insurance coverage reached an important milestone this quarter. For the first time, they became the leading mortgage product for first-time homebuyers. Because of limited savings, about 80 percent of first-time homebuyers used some form of low down payment mortgages, including conventional loans with private mortgage insurance, FHA loans, VA loans and USDA loans. Loans to first-time homebuyers have previously been dominated by government lending programs, which are ultimately backed by taxpayers. FHA loans have historically been the most popular product, but in recent years conventional mortgages with private mortgage insurance coverage have made significant improvement in winning first-time homebuyers. When first-time homebuyers purchase homes using the conventional mortgage market with private mortgage insurance, private capital, rather than taxpayers, assumes any housing credit risks.
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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.