First-Time Homebuyer Market Report

By Tian Liu, Genworth Mortgage Insurance’s Chief Economist

First-Time Homebuyer Market Report

Findings for 3rd Quarter 2020

The third quarter of 2020 was a remarkable quarter for both the housing market and the first-time homebuyer segment, with the most first-time homebuyers purchasing homes in 20 years, and the highest level of home sales since 2006. Even though the economy is still in the middle of the recession, and a large number of workers remained unemployed or unable to participate in the labor force, there was overwhelming demand for housing and homeownership from those still able to purchase a home. Indeed, the third quarter saw an unexpected boom in the housing market. That boom in first-time homebuyer activity is the result of record low interest rates, a decrease in other large expenditures such as personal services, leisure, and travel, and a greater appreciation for the value of homeownership.

During the pandemic, homes have taken on new roles in people’s lives as many businesses and schools have shifted to remote operations and learning, and many social activities have shifted from locations outside the home to either online, in the backyard or outdoor spaces. These added functionalities during the pandemic encouraged many Americans to become first-time homebuyers in the quarter, while historically low interest rates have made monthly mortgage payments and homes more affordable for any given level of home price. The rising housing demand also came from existing homeowners this quarter resulting in increased repeat buyer activity, as rapid and profound shifts in both work and life changed where people want to live, the kind of homes they want, and how much they want to pay. Therefore, the third quarter saw a near-record first-time homebuyer market and a large increase in repeat buyer activity, which pushed total home sales to its highest level since 2006. While new construction has already seen a strong increase, demand has outpaced supply in the short run, which meant higher home prices. Higher home prices offset lower rates thereby leaving mortgage payments almost unchanged.

The Largest First-Time Homebuyer Market in 20 Years

At the end of the third quarter, the first-time homebuyer market ended with a total of 700,000 single-family home purchases (Figure 1), up 15.7% from a year ago. Adjusting for seasonality, the number of first-time homebuyers increased by 16.3% from the previous quarter to a seasonally-adjusted annual rate of 2.55 million in Q3 (Figure 2) – the fastest pace on record. The strength of the first-time homebuyer market was impressive whether measured in growth rate or in number, especially considering that the economy was still in the middle of a pandemic and a recession. The first-time homebuyer market has quickly exceeded the pre-pandemic purchase level. The quarter started very strong, with the number of first-time homebuyers increasing by 45,000 from June to July, reaching the best single monthly figure on record of 244,000 first-time homebuyers. The momentum continued throughout the rest of the quarter, as the number of first-time homebuyers remained strong in August and September at 233,000 and 223,000, respectively. In this turbulent year, the first-time homebuyer market has performed beyond all expectations. In the first nine months of the year, just over 1.7 million Americans became first-time homebuyers, which is nine percent higher than the same period a year ago.

Given the strong market condition in the year so far, 2020 will likely have one of the strongest first-time homebuyer markets in history, approaching previous highs of 2.38 million in 1999 and 2.26 million in 2000. This comes after three years of strong first-time homebuyer market activity, when the number exceeded 2 million each year. As we have noted in previous editions, there is a strong demographic foundation for this strength, as the largest cohort in history, the Millennial generation, is reaching its early-thirties, the peak homebuying ages. There also is a strong cyclical foundation for the strength in the first-time homebuyer market since as many as 3 million delayed purchasing their first homes in the aftermath of the 2008 – 2009 recession. In addition to these factors, the first-time homebuyer market also likely benefited from better affordability due to falling interest rates. Moreover, large expenditures on travel, leisure, and personal services have decreased significantly during the pandemic, freeing up disposable income to be used toward housing.

While it is difficult to separate the impact of lower interest rates and the shift in preference for homeownership, there has been a large shift toward homeownership in the past two quarters. The Census Bureau’s Housing Vacancy and Homeownership Survey has shown that as of the third quarter of 2020, the homeownership rate among the under-35 age group has increased by 2.7 percentage points to 40.2% from a year ago and the homeownership rate among the 35 to 44 age group has increased by 3.6 percentage points to 63.9%. In September, Fannie Mae’s National Housing Survey also showed that 71 percent of potential movers preferred buying over renting, the highest level in the survey’s history.

Figure 1: Quarterly Sales to First-Time Homebuyers
Figure 2: Annualized Home Sales

A Profound Change in Homeowner Preferences

The large increase in repeat homebuyer activity in the housing market this quarter reflects profound and rapid changes in both work and life during the pandemic, resulting in a large shift in homeowner preferences within a short period of time. What it means to be in a “better location,” one of the fundamental drivers of value in real estate, has shifted as a result of the pandemic. Better locations are more likely further away from the office because greater flexibility to work from home has made commute time a less important factor. Property features such as additional rooms to function as an office, classroom, or a guest bedroom have become more valuable. The simultaneous increase in housing demand from first-time and repeat buyers has resulted in a housing boom with demand outstripping supply. According to the National Association of Realtors, supply of homes for sale has decreased from 3.7 months of sales in June to 2.5 months in September.

The large shift in homeowner preferences means that many homeowners are no longer satisfied with their existing homes. While renovations and remodeling can work in some cases, purchasing a different home is often necessary. When preferences among a large number of existing homeowners change, it can result in a surge in repeat buyer activity, which happened in the third quarter. Compared to the first-time homebuyer market, the repeat buyer market reported an even stronger growth in the third quarter, increasing by 17 percent from a year ago to 1.08 million units in the third quarter. In the first nine months, repeat buyers purchased a total of 2.55 million homes, which is a decrease of one percent compared to the same period last year. The decrease in the year-to-date number is due to the sharp slowdown during Q2, which also explains the stronger rebound this quarter. Adjusting for seasonality, the number of repeat homebuyers increased by 43 percent from the previous quarter to a seasonally adjusted annual rate of 3.93 million, which is the highest figure since Q1 2007 when 4.49 million units were sold. Because of the faster growth rate from the repeat buyers, the percent of home sales going to first-time homebuyers decreased from 41 percent in Q2 to 39 percent in Q3 (Figure 3). Despite the slight decrease in percentage, the first-time homebuyer segment remains important to the housing market and the mortgage market. In the purchase mortgage market, first-time homebuyers represented 58 percent of purchase loan borrowers in Q3 (Figure 4), up one percentage point from Q2.

Figure 3: First-Time Homebuyer Mix Housing Market
Figure 4: First-Time Homebuyer Mix Purchase

Lower Mortgage Rates Still Supporting Housing Affordability

Mortgage rates continued to trend lower in the third quarter, playing a critical role in supporting housing affordability. Mortgage rates for first-time homebuyers decreased from 3.36% in June to 3.01% in September, the lowest interest rate for mortgages on record (Figure 5). Home prices, down payments, and interest rates all play a role in determining the monthly principal and interest payment, which is one measure of housing affordability. The First-Time Homebuyer Mortgage Payment Index (Figure 6) tracks the monthly principal and interest payment based on the average mortgage interest rate facing first-time homebuyers and FHFA’s Purchase-Only Home Price Index. Two sub-indices track the impact of interest rate and home price movements on mortgage payment separately. Compared to Q2, lower interest rates reduced mortgage payment by four percent, while higher home prices increased mortgage payment by three percent. Compared to the previous quarter, when housing demand was impacted by the pandemic, home prices have accelerated in the third quarter as one would expect during a boom – almost completely offsetting the impact of lower interest rates on the mortgage payment. Overall, the mortgage payment index shows that the mortgage payment for first-time homebuyers decreased by one percent. The rapid growth in housing demand and rising home prices are powerful incentives for homebuilders to ramp up production, which rebounded strongly in the third quarter. Single-family housing starts jumped 36 percent from Q2 to a seasonally adjusted annual rate of 1.04 million units in Q3, the highest quarter since Q2 of 2007.

Figure 5: Interest Rates
Figure 6: Mortgage Payment Index

Housing Finance System During the Housing Boom

The housing finance system continued to perform well during the third quarter to ensure access to credit for first-time homebuyers. The COVID-19 pandemic has stressed the housing finance system in three ways: more hurdles to buy and sell homes; tighter credit availability due to increased credit risk – both actual and perceived; and lack of mortgage industry capacity due to rising demand for refinancing. Credit availability for potential first-time homebuyers can be especially vulnerable since first-time homebuyers rely heavily on low-down payment mortgages for financing. The record number of first-time homebuyers suggests that the mortgage industry has been largely successful in maintaining access to credit. The mortgage industry has quickly and successfully shifted a large number of employees from the office to working from home by leveraging technology, which ensured that qualified borrowers can continue to access credit, while maintaining social distance protocols. As a result, the real estate financing industry has been among a small number of industries that reported job growth since February. As of October, while overall payroll employment is down five percent from February, real estate finance sector employment is up 11 percent, and is at its highest level since August 2007.

Importantly for the first-time homebuyer market, credit access to low down payment mortgages also continued. In the third quarter, 577,000 first-time homebuyers bought homes with a low-down payment mortgage, accounting for 82 percent of the first-time homebuyer market (Figure 7). Low-down payment conventional mortgages backed by private mortgage insurance financed a record 285,000 first-time homebuyers in the quarter, an increase of 34 percent from a year ago (Figure 8). It helped finance more first-time homebuyers than any other low-down payment mortgage product. The FHA loans program financed 195,000 first-time homebuyers during the quarter, an increase of eight percent from a year ago.

Figure 7: Down Payment Choice
Figure 8: Loan Type

Differentiated Impact Across the Country

An overwhelming number of states reported higher numbers of first-time homebuyers in Q3 compared to a year ago (Figure 9). Only three states, New York, Pennsylvania, and Hawaii reported fewer first-time homebuyers in the quarter compared to a year ago. The rebound in the Northeast also appears to be less robust, with Vermont, Massachusetts, New Hampshire, Maine, and Rhode Island reporting year-over-year growth rates in the low single digits. The Midwest states mostly reported double-digit growth rates, which is the fastest growth rate in their first-time homebuyer markets in years. Michigan reported the slowest rebound this quarter, with a 5 percent year-over-year increase. The interior and southern states reported some of the strongest growth rates in the country, with South Dakota, Texas, Arkansas, and Iowa reporting growth rates of high-20 percent and low-30 percent.

The booming third quarter also has largely erased the sharp declines in the first-time homebuyer market in the prior quarter. Year-to-date, 47 states and territories reported a higher number of first-time homebuyers, with only Pennsylvania, New York, Michigan, Puerto Rico, and Hawaii reporting fewer first-time homebuyers due to larger impact from the COVID-19 pandemic. In recent years, Texas, Florida, Georgia, North Carolina, and Virginia have become more important markets for first-time homebuyers, while California, New York, Illinois, and Pennsylvania have lost ground due to migration, economic condition, and housing affordability. The pandemic and the subsequent boom in the first-time homebuyer market also have resulted in an acceleration of changes in where states rank on the first-time homebuyer strength scale. North Carolina is now the seventh largest first-time homebuyer market in the country, moving up two spots from last year, however, New York decreased by two spots to the eleventh position.

Figure 9: Year Over Year by State

Three Takeaways

Takeaway #1: Despite the COVID-19 pandemic and a deep recession, the housing market has staged an unexpected and strong rebound in the third quarter, with a near-record number of first-time homebuyers and a strong increase in the number of repeat buyers. The pandemic has increased preference for homeownership as homes are serving as shelter, office, and classroom. Lower interest rates have made homes more affordable, while reduced spending on personal services, travel, and leisure has increased the share of expenditure available for housing. A shift in housing preference among existing homeowners is driving repeat buyer activities as they look for different locations and different home features. The housing boom has resulted in higher home prices and sparked an increase in new construction of single-family homes.

Takeaway #2: The strength in the first-time homebuyer market was broad-based with most states reporting higher first-time homebuyer activity during Q3. Growth is stronger in the South and among interior states, and weaker in the Northeast and Michigan. New York, Pennsylvania, and Hawaii reported lower first-time homebuyer activity in Q3.

Takeaway #3 Overall, the housing finance system was able to maintain credit availability for first-time homebuyers during the COVID-19 pandemic despite the enormous challenges. The percentage of home sales to first-time homebuyers remained higher, and a high percentage of first-time homebuyers used low-down payment mortgages. The private mortgage insurance industry played a significant role in maintaining credit availability, financing a record 283,000 first-time homebuyers during Q3. The housing finance system has largely maintained credit availability to date by focusing on prudent underwriting, having adequate capital in the financial system, a significant presence for the agency market that will take on credit risk during periods of market stress, and continuing to invest in technology to aid in industry capacity elasticity.

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.

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.

You-centric solutions that matter.
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.

Send your feedback!