First-Time Homebuyer Market Report

By Tian Liu, Genworth Mortgage Insurance’s Chief Economist

First-Time Homebuyer Market Report

2Q 2020 Key Takeaways

During the second quarter of 2020, the COVID-19 pandemic forced the shutdown of the U.S. economy, triggering a sharp slowdown in the housing market and the first-time homebuyer segment.  As outlined in the First-Time Homebuyer Market Q1 Takeaways, early indicators from rate lock volume suggest that the market was in the early stages of a strong rebound in the second quarter.  This edition of the first-time homebuyer report gives a definitive account of how the pandemic affected the housing market during the second quarter of 2020.

A Sudden Change of Direction for the Market

The first-time homebuyer market ended the quarter with the purchase of 539,000 single-family homes (Figure 1), down 4.6% from a year ago. Adjusting for seasonality, the number of first-time homebuyers decreased by 18% from the previous quarter to 1.86 million in Q2, (Figure 2) – the slowest pace since 2016.  That was a sudden change in direction for the first-time homebuyer market as the previous quarter had reported the most first-time homebuyers since 2006.  Like the rest of the economy, the first-time homebuyer market was adversely impacted by the COVID-19 pandemic.

As noted in the Q1 Takeaways, the market was already in the early stages of a rebound toward the end of the second quarter, which has moderated the decrease. Between May and June, the number of first-time homebuyers increased by 16.7% and the year-over-year variation moved from down 14.9% to up 0.2%. Even with the COVID-19 pandemic, just over one million Americans became first-time homebuyers in the first half of 2020, which was 4% higher than a year ago.[1]

[1]Based on this measure, the first-time homebuyer market was down 5.4% in Q2 from a year ago.

First-Time Homebuyers Out-Performed Repeat Buyers

Compared to the first-time homebuyer market, the repeat buyer market reported a worse downturn in the second quarter, decreasing by 19% from a year ago to 793,000 units in the second quarter.  Adjusting for seasonality, the number of repeat homebuyers decreased by 17% from the previous quarter to 2.74 million.

Interestingly, the market share of first-time homebuyers in the housing market has not decreased during the COVID-19 pandemic.  First-time homebuyers represented 40% of single-family home sales in the quarter (Figure 3), up by three percentage points from a year ago. In the purchase mortgage market, first-time homebuyers represented 57% of purchase loan borrowers (Figure 4), up by two percentage points from a year ago.

Lower Rates Helped to Ease Housing Affordability

First-time homebuyers enjoyed improved housing affordability in Q2, as mortgage rates for homebuyers decreased between March and June to end at their lowest level since 2012 at 3.36% (Figure 5).  The monthly principal and interest cost for first-time homebuyers decreased by two percent from Q1 (Figure 6), as lower interest rates reduced payments by four percent.

While lower interest rates have helped to make homes more affordable to first-time homebuyers this quarter, over the longer term they have not been able to offset higher home prices due to inadequate increases in supply and strong demand from first-time homebuyers.  Between January of 2013 and now, the monthly principal and interest cost for first-time homebuyers has increased by 55%, almost entirely due to higher home prices.

Housing Finance System During the Pandemic

An important goal of the housing finance system is to ensure access to credit during both normal and stressful market conditions.  Seismic economic events like the COVID-19 pandemic can create stress in the housing finance system in three ways: more hurdles to buy and sell homes; increased credit risk due to the worsening economic environment; and a stretched industry from 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.

So far, the mortgage industry has performed well in dealing with these challenges. In particular, the mortgage industry has quickly and successfully shifted a large number of employees from the office to working from home by leveraging technology.  Because of this, the financial services industry has seen the smallest job losses among all the major industries.  While the overall payroll employment is down eight percent from a year ago, finance sector employment is down only one percent.

The agency mortgage market also played an important role during the second quarter, expanding to provide liquidity for borrowers.  Based on data from Inside Mortgage Finance, Fannie Mae, and Freddie Mac, the share of mortgage lending expanded to around 67% in the second quarter, compared to 49% in the first quarter.  Low down payment mortgages continued to be made.  In the second quarter, 449,000 first-time homebuyers bought homes with a low-down payment mortgage, accounting for a record 83% of the first-time homebuyer market (Figure 7).  Low-down payment conventional mortgages backed by private mortgage insurance financed 207,000 first-time homebuyers in the quarter (Figure 8). It helped finance more first-time homebuyers than any other low-down payment mortgage product and was the only product that showed a year-over-year increase during the second quarter. The FHA loans program financed 161,000 fist-time homebuyers during the quarter.

The housing finance system did experience some dislocations during the second quarter.  Two notable areas are the FHA market, where some lenders increased the credit score required to qualify for a loan; and the so-called non-agency mortgage market, which are loans that are not backed by either Fannie Mae and Freddie Mac, or government agencies including the FHA, VA, and the USDA.  The uncertainties created by the COVID-19 pandemic have made some lenders unwilling to assume the credit risks on such mortgages.  As a result, the FHA market financed 30% of first-time homebuyers, down from 35% in the first quarter, while the non-agency market financed only 4%t of first-time homebuyers, down from 8% in the first quarter.

The reduced market share of FHA and non-agency mortgages made the private mortgage insurance industry more important for the first-time homebuyer market in the second quarter.  Private mortgage insurers financed 38% of first-time homebuyers, up from 30% in the first quarter, and a new record for the industry.

Differentiated Impact Across the Country

While the COVID-19 pandemic had a generally negative impact on the first-time homebuyer market (for example, we found that the number of rate locks by potential first-time homebuyers decreased by 27% in April from March and 48 states reported lower rate locks), its impact was not uniform across states.  A total of 35 states and Puerto Rico (Figure 9) reported fewer first-time homebuyers compared to the same period a year ago, but 16 states reported more first-time homebuyers.  The most negatively impacted states either saw significantly higher amounts of Covid-19 cases (Massachusetts, Michigan, and New York) or implemented stay-at-home orders (Pennsylvania).  States with smaller populations tended to avoid the worst impact of the pandemic.  The pace of recovery also could be very different depending on the timing and success in getting the virus under control, as well as each state’s exposure to impacted industries such as travel, tourism, and energy.

Released in June, the First-Time Homebuyer Market Q1 Takeaways used the rate lock volume data provided by Optimal Blue, a product pricing engine (PPE) used by mortgage lenders that lock around 34% of all completed mortgages, to understand the real-time trend in the first-time homebuyer market.  Rate locks occur early in the mortgage origination process and typically result in home sales and loan closing within one to two months.  The content below continues that effort to look at trends in the first-time homebuyer market in the period between May and July.

Ready to Move

One of the surprising features of the impact of the COVID-19 pandemic is that after the initial volume decrease in April, the housing market staged a strong recovery in May and June that exceeded all expectations.

Nationally, the number of rate locks by first-time homebuyers increased by 55% between April and June. No states reported negative growth during this period.

States that saw an early impact from the pandemic staged strong recoveries. New York, Pennsylvania, New Jersey, and Michigan saw recoveries in first-time homebuyer rate locks of more than 100% between April and June (Figure 10).

The recovery in the repeat buyer market was even stronger, growing by 106% nationally between April and June (Figure 11). A total of 29 states grew by over 100% during this period.  States that saw strong rebounds in the number of first-time homebuyers also saw strong rebounds in the number of repeat buyers.

Among the top-50 MSA-level housing markets in the country, 46 have reported positive year-over-year growth in the number of first-time homebuyers for the first 7 months, and all 50 have reported positive growth in the number of repeat buyers (Figures 12 & 13).

The stronger rebound in repeat buyers suggests that homeowners may be reassessing their housing needs to take into account the likelihood of a continued work from home arrangement, online education for children, and more attractive home prices.

Growth slowed among both first-time homebuyers and repeat buyers in July, resulting in a 7% decline in the number of first-time homebuyers and a 7% increase in the number of repeat buyers between June and July (Figure 13). The initial strong growth may have benefited from more affordable home prices, as housing demand recovered, and average loan sizes. By implication, home prices also have rebounded so overall affordability has become less favorable compared to earlier in the year.

Median home prices at the MSA-level have generally shown stronger growth for first-time homebuyers than for repeat buyers (Figure 14).

CONCLUSION

The COVID-19 pandemic pushed the U.S. economy into the sharpest recession on record in March. The housing market also began correcting in April, resulting in an 18% decrease in the number of first-time homebuyers in the second quarter compared to the first quarter.  A quick rebound in June  moderated the market decline.

Geographically, the COVID-19 pandemic impacted different geographies differently. States with more infections, states that implemented more comprehensive shutdowns, and states with greater economic exposures to impacted industries such as travel, tourism, hospitality, education, and energy saw a bigger hit to their first-time homebuyers market in the second quarter.  Hard-hit states included New York, Michigan, Massachusetts, and Pennsylvania.  But these states also reported stronger rebounds in May and June, based on rate lock data.

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 did not decrease from pre-COVID-19 levels, and the percentage of first-time homebuyers using low-down payment mortgages increased to 83%, which is higher than the historical average.  The private mortgage insurance industry played a significant role in maintaining credit availability, financing over 200,000 first-time homebuyers, or almost four out of every ten.  Conventional mortgages backed by private mortgage insurance was the only low-down payment mortgage product to finance more first-time homebuyers than a year ago.  Credit availability did contract more noticeably for FHA loans and conventional loans not backed by Fannie Mae and Freddie Mac.  This may have had a bigger impact on borrowers with weaker credit histories.  The main reasons that the housing finance system has largely maintained credit availability to date include a focus on prudent underwriting, having adequate capital in the financial system, a significant presence for the agency market that will take credit risk during periods of market stress, and continued investment in technology to make the industry capacity more elastic.

The quick and strong rebound in the housing market was a surprise. While the recovery has been very broad-based with no decreases in any market segment, the strongest rebounds have been by repeat buyers and in areas that were most impacted. The latest data for both first-time homebuyers and repeat buyers show that both groups are buying homes at a faster pace than in the same period last year. This rapid recovery also could mean that the housing market could reach a new normal quickly, as growth has already slowed in July.

There is still much uncertainty about the COVID-19 pandemic and its impact on both the economy and the housing market. One big question is if there will be any permanent changes in where people live and the kind of homes they want as a result of the COVID-19 pandemic.  The evidence so far is mixed.  The rapid rebound in the housing market, especially in areas hit hard in April suggests limited changes to homebuyer behavior.  Other trends, such as a stronger rebound for repeat homebuyers and strong demand for remodeling and renovation, suggest a deep shift in preferences and needs on the part of existing homeowners.

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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