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.