The Seventh Edition of the First-Time Homebuyer Market Report
In the third quarter, the housing market experienced a moderate but broad slowdown. The slowdown resulted in lower sales of new and existing homes, a slight increase in housing inventory and supply, lower growth in new single-family home construction, and slower home price growth. This quarter’s report unpacks potential causes for why the housing market slowed in Q3, how it affected different homebuyers, where the slowdown was more acute, and how first-time homebuyers reacted to the slowdown—but if you just want the highlights, here are a few takeaways:
- The first-time homebuyer market has been more resilient during the housing slowdown compared to repeat buyers.
First-time homebuyers continued to be very active in the housing market. In fact, the biggest surprise in this report is that despite the slowdown in the housing market, the number of first-time homebuyers increased from a year ago. This is a reminder that first-time homebuyers differ from other buyer groups in terms of why they buy. Many have spent years renting, and are now reaching the time in their life where renting no longer makes sense. This helps the first-time homebuyer market stay strong in the face of falling affordability. The relative strength in the first-time homebuyer market has been beneficial to the private mortgage insurance industry. The industry saw a 17% year-over-year increase in the number of first-time homebuyers. Low down payment conventional loans with private mortgage insurance were the largest source of credit for first-time homebuyers this quarter.The housing slowdown has had a bigger impact on repeat homebuyers, resulting in lower sales to those homebuyers. The part of the housing market that primarily serves repeat homebuyers has also been hit hard. For example, the homebuilding industry saw sales fall in every price point above $300,000 this quarter. That largely explains why homebuilder confidence has weakened in recent months and may lead to lower levels of housing construction. The homebuilding industry may also want to look at expanding the number of homes built for first-time homebuyers.
- The housing market slowdown is driven by rapidly falling affordability, which resulted from rising interest rates and rising home prices.
The recent increase in the cost of buying a home has been significant. The combination of higher home prices and higher interest rates means that buying the same house costs 15% more in the third quarter than it did one year ago. Across the U.S. economy, the average worker is currently experiencing wage growth of just 3%, which is not enough to offset the deterioration in housing costs. This affordability challenge has resulted in a slower rate of growth in home prices in the past two quarters.
- First-time homebuyers are deeply affected by falling affordability, which is forcing many to look for lower-priced homes.
One should not mistake resilience in the first-time homebuyer market for indifference. First-time homebuyers are still concerned about the rapidly rising cost of buying a home. Since the second half of 2017, the year-over-year growth in home sales to first-time homebuyers has slowed to less than 3%. First-time homebuyers are searching for “affordable options” that may come in the form of lower-priced homes—that may be smaller, with fewer features and further away from work and amenities—to stay within budget. The result is more apparent at the top-end. In the third quarter, prices in the top 40% most expensive homes for first-time homebuyers declined compared to a year ago. This is the same pattern observed in 2013 and 2014, in the aftermath of the “Taper-Tantrum,” when prices fell at the higher-end for first-time homebuyers and then cascaded down into lower price points, which suggests that we may be at the beginning of a similar event. This is why affordability will likely remain the number one issue facing potential first-time homebuyers, even though the number of potential first-time homebuyers remains large.
- The housing slowdown looks more serious in around a third of the states, where affordability challenges are more severe or there are other economic challenges facing first-time homebuyers.
The boom in the first-time homebuyer market between 2014 and 2017 stretched across most of the country. Among some of the fastest-growing states, Florida, Georgia, Arizona and Nevada each grew by 60 –70% during this period. There have been very few exceptions to this trend, and they tend to be limited to smaller states with unique economic and housing market conditions. These included small energy-producing states, like North Dakota and Wyoming. With falling affordability, a more divergent pattern is emerging across the country. First-time homebuyers continued to grow in most states in the third quarter, including Florida, Georgia, Arizona, Mississippi, Virginia, and North Carolina. However, sales declined across 19 states, including California, Texas, New Jersey, New York, Michigan, Massachusetts, Illinois, and Indiana.
After leading the growth in housing market transactions for the past three years, first-time homebuyers remained active despite affordability challenges. This is an important data point, because it shows that the fundamentals of the current housing cycle, such as a strong labor market, younger households reaching homebuying age, and the return of first-time homebuyers who delayed purchasing a home over the last ten years, are still in place. It shows that many younger consumers still have enough income to buy a home and remain confident about the economy and housing market after more than nine years of economic expansion. However, rising interest rates, higher home prices and supply constraints also are symptomatic of the challenges facing the wider economy at this stage of the economic cycle. It is presenting tough choices for many aspiring first-time homebuyers, forcing them to search for more affordable homes and slowing their path to homeownership. These two opposing forces are at play across the country, resulting in more diverging trends. Affordability will likely remain the number one issue facing the housing market.
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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.