First-Time Homebuyer Market Report

By Tian Liu, Genworth Mortgage Insurance’s Chief Economist

First-time homebuyer market report

3rd Quarter 2019 – Summary of Findings

While the housing market experienced a strong third quarter overall, dynamics in the first-time homebuyer market continue to shift, based on these five market observations:

  1. The first-time homebuyer market finally rebounded. Although the rebound was modest compared to the number of first-time homebuyers a year ago, and a quarter behind the broad rebound in the housing market, it was a strong rebound from the previous quarter allowing first-time homebuyers to make up some lost ground.
  2. Sales in the repeat buyer market saw its fastest growth since the early years in the current housing cycle. If sustained, this suggests a shift in the growth drivers in the housing market from first-time buyers to repeat buyers.  More importantly, if the trend is sustained, it may suggest a turnaround in homeowner mobility, which has been depressed this cycle.
  3. Housing affordability continued to improve. While falling mortgage rates played an important role, the large increase in supply in the affordable segment is helping to stabilize home price growth.  Over the longer term, the addition of affordable housing supply will be more durable than the maintenance of low interest rates.
  4. Low down payment mortgages[1] remain at the core of mortgage financing for first-time homebuyers and continue to support the shift away from government loan programs toward conventional loans with low down payments.
  5. Falling mortgage rates have created the first opportunity for many first-time homebuyers from the past two years to refinance. The large decrease in interest rates and the size of the first-time homebuyer market over the past two years have created opportunity for the largest first-time homebuyer refinance since the early-2000s.
[1] Low down payment mortgages are mortgages with a down payment of less than 20 percent.

Q3 2019 Key Takeaways

1. The first-time homebuyer market rebounded in Q3.

In the past three quarters, overall home sales and sales to first-time homebuyers have slowed.  First-time homebuyers purchased 591,000 single-family homes in Q3, up one percent from a year ago (Figure 1).

While the growth was modest, it came on top of a historically large first-time homebuyer market.  To put it in perspective, the number of first-time homebuyers this quarter was comparable to the peak of the last housing boom in 2005 and 2006, and only modestly below the peak levels of 1999 and 2000.

The rebound in the first-time homebuyer market arrived amid a broad upturn in the housing market.  Overall sales of single-family homes showed its first year-over-year increase since late-2017, increasing by five percent from the same quarter a year ago.

2. The repeat buyer market expanded.

In recent quarters, growth in home sales has begun to shift away from first-time homebuyers to repeat buyers.  The number of repeat homebuyers grew by seven percent in Q3, one of the fastest growing quarters since 2012-2013, in the early stages of the current housing recovery.

An important feature of the current housing cycle is that homeowners are staying in their homes longer, depriving the market of sales to repeat homebuyers.  Data from the Census Bureau also suggests that Americans have become less mobile in recent years.  This in turn, has led to flat sales to repeat homebuyers since 2013.  That makes the strong growth in home sales to repeat homebuyers interesting, because if it continues, it would signal that more homeowners are seeking to move.

Removing the seasonality from the housing market data, home sales to first-time homebuyers increased by nine percent from Q2 to a seasonally adjusted annual rate of 2.14 million units (Figure 2), outpacing the three percent growth in the overall sales of single-family homes.

Since Q4 2018, improved housing affordability has increased home sales by eight percent and increased sales to first-time homebuyers by four percent.  The recovery in the first-time homebuyer market lagged the overall market by a quarter, but is beginning to catch up.

First-time homebuyers continue to represent a large part of the activities in the housing market.  In Q3, they represented 39 percent of all buyers in the single-family housing market and 55 percent of all purchase money borrowers (Figures 3 and 4).  That means 39 percent of the customers of realtors and 55 percent of the purchase customers of mortgage lenders are first-time homebuyers.

While the presence of first-time homebuyers has expanded significantly since the early stages of the housing cycle (they represented just 30 percent of single-family homebuyers and 53 percent of purchase money borrowers in 2013), the growth trajectory of its market share has flattened due to the segment’s slowing sales growth.

The current 39 percent share of first-time homebuyers in the housing market is high relative to the historic average of 35 percent since 1994.  Demographics play a large role in the number of first-time homebuyers, as a historically large number of millennials are beginning to reach their early 30s.

According to data from the Census Bureau, the average homeownership rate is currently 15 percentage points higher (a 47 percent increase in just five years) for those between the ages of 30-34 compared to those between the ages of 25-29.  The sharp increase in homeownership rate from late 20s to early 30s implies that millennials are in the middle of their transition from renting to owning, which explains the higher mix of first-time homebuyers in the housing market.  Millennials currently span the ages of 23 and 38, so their transition is only around halfway complete.

The rebound in first-time homebuyers was widespread, with a total of 32 states reporting more first-time homebuyers compared to the same period a year ago in Q3, compared to 10 states in Q2 (Figure 5). This also included a few large states, with Florida reporting the fastest year-over-year growth at six percent, and Texas growing by three percent.  Meanwhile, other major states saw a stabilization in the first-time homebuyer market, including California, Arizona, Georgia, New Jersey, Washington, and Illinois.

3. Housing affordability is improving due to lower mortgage rates and slower home price growth, as more affordable new homes were delivered in the quarter.

More than any other factors, lower interest rates and slower growth in home prices have helped improve housing affordability and drive the rebound in the first-time homebuyer market.  These trends continued in Q3.

The Freddie Mac Primary Mortgage Market Survey® showed a 35-basis point drop in the 30-year conventional mortgage rate over the last quarter to 3.66 percent, while the interest rate for first-time homebuyers decreased by 41 basis points to 4.11 percent, the lowest level since Q4 2016 (Figure 6).  The lower rates have meant significant savings for first-time homebuyers.  On a $250,000 loan with a 30-year term, a 41 basis points decrease in interest rate means a monthly savings of $60.

The year-over-year growth rate in home values, based on the Federal Housing Finance Agency’s Purchase-Only Index, slowed to 4.6 percent in August compared to five percent in Q2.  Quarter over quarter, home values were unchanged.  As a result, total mortgage payment decreased by five percent from a year ago, its first decrease since Q1 2015 (Figure 7).

One reason for the slowdown in home price growth is that the housing supply for first-time homebuyers—new homes priced in the $250,000 – $300,000 price range—has seen a significant increase this year.  According to data from the Census Bureau, in the first three quarters, new home sales in this price range increased by 31 percent from a year ago, more than the increase in all other price segments combined.

4. Low down payment mortgages remain crucial for first-time homebuyers.

First-time homebuyers remain highly dependent on affordable mortgage products and lower-priced homes.  A 20 percent down payment is beyond what most first-time homebuyers can save before their peak household formation age of early to mid-30s.  That is why, historically, a large majority of first-time homebuyers have used some form of low down payment mortgages, including conventional, FHA, VA, and USDA loans.

Low down payment mortgage products were used by 473,000 first-time homebuyers, or 80 percent of all first-time homebuyers in Q3 (Figure 8).  By comparison, only 117,000 first-time homebuyers put down more than 20 percent of the purchase price in down payment.

Low down payment mortgage is both a critical source of capital for first-time homebuyers, and a major product for the mortgage industry.  Even within the low down payment market segment, loans with lower down payments tend to have a higher mix of first-time homebuyers.  Within the conventional mortgage market, for example, 88 percent of purchase loans in 2018 with a 3-5 percent down payment went to first-time homebuyers. This is significantly higher than the 53 percent mix for those with a 5-10 percent down payment, and the 27 percent mix for conventional purchase loans with a 20 percent or more down payment.

More than any other product, conventional mortgages with low down payments, enabled by private mortgage insurance, have experienced the most growth between 2014 and 2018, almost doubling the number of first-time homebuyers they served from 346,000 to 684,000.  Beginning in 2018, low down payment conventional mortgages have become the most widely-used mortgage product for first-time homebuyers.  That trend continued in Q3, with a total of 209,000 first-time homebuyers using low down payment conventional mortgages (Figure 9), accounting for 35 percent of all first-time homebuyer purchases.

The broad rebound in the first-time homebuyer market this quarter also has boosted government lending, which continues to play a large role in the market, accounting for 43 percent of all first-time homebuyers.  Government agencies operate three mortgage insurance programs that back FHA, VA, and USDA loans.  Altogether, 251,000 first-time homebuyers used some form of government loans in Q3, up one percent year over year.  FHA loans, which have traditionally been the loan product most used by first-time homebuyers, were used by 175,000 first-time homebuyers in Q3, unchanged from a year ago.

5. First-time homebuyers from the past two years now have their first opportunity to refinance.  

Lower interest rates this year have helped improve affordability not just for new first-time homebuyers, but also many existing homeowners, including many first-time homebuyers who purchased in 2017, 2018, and Q1 2019.  A key difference between this year’s refinance wave and previous waves in 2013 and 2016 is that this year’s refinance borrowers will likely include a much larger number of first-time homebuyers than previous waves.

A total of 4.53 million first-time homebuyers bought homes during this period, and many of them are facing their first opportunities for a refinance this year.  In contrast, previous refinance waves had fewer first-time homebuyers because there were fewer first-time homebuyers leading up to the refinance opportunity.

Based on our estimate, there were just 2.25 million first-time homebuyers during the six quarters before the 2016 refinance wave, and 1.59 million during the five quarters before the 2013 refinance wave.  It is a testament to how much this housing cycle has been driven by growth in the first-time homebuyer market, as well as the opportunities this group of homebuyers bring to the housing industry.

CONCLUSION

Home sales have recovered from an affordability-driven slowdown last year, and there are positive signs from this year’s strong growth in the supply of affordable housing units.  The large increase in supply in the affordable segment should be critical to stabilizing home price growth and making the housing market less sensitive to rising interest rates and therefore more stable.

The first-time homebuyer market is also telling us that a change may be coming, as growth in the housing market is transitioning from first-time homebuyers to repeat-buyers.  Historically,  higher sales to repeat buyers have often meant higher mobility among existing homeowners .

Additionally, falling mortgage rates have created the first opportunity for many first-time homebuyers from the past two years to refinance.  Unlike previous episodes of large decreases in interest rates in 2013 and 2016, the number of first-time homebuyers who could benefit from refinancing is far greater.  This serves as a reminder that buying a first home is just the beginning for a homeowner, and more opportunities exist to participate in housing finance.

About Tian Liu

Tian Liu has served as Chief Economist for Genworth Mortgage Insurance Corporation since 2014. He is responsible for tracking and analysis of U.S. and regional economic conditions. He authors the company’s Weekly Economic Report and provides regular updates on housing and mortgage markets.

Mr. Liu began covering the U.S. housing market in 2007. His commentary on the housing market has appeared in the Wall Street Journal, New York Times, CNBC, Washington Post, and other notable publications.

Mr. Liu has a Masters in Economics from the University of Chicago and an undergraduate degree in Economics from the Australian National University. He resides in Raleigh, North Carolina, with his wife and two children.

tian.liu@genworth.com

919 807.9584

About Genworth Mortgage Insurance

Genworth Mortgage Insurance, an operating segment of Genworth Financial, Inc. (NYSE: GNW), is headquartered in Raleigh, North Carolina, and operates in all 50 states and the District of Columbia. Genworth Mortgage Insurance works with lenders and other partners to help people responsibly achieve and maintain the dream of homeownership by ensuring the broad availability of affordable low down payment mortgage loans. Genworth has been providing mortgage insurance products and services in the U.S. since 1981.

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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.

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