First-time homebuyer participation hits three-decade low

Both resales and new home purchases by first-time homebuyers are well below historic norms. What does that mean for the future of housing?

what-happened-housing-recoveryFirst-time homebuyers are the bedrock of the housing market, the foundation upon which all housing activity rests. The amounts first-time homebuyers can borrow determines the floor of housing market prices because first-time homebuyers generally have limited savings to push prices up beyond what lenders will loan them.

Most first-time homebuyers don’t have 20% down for a house, particularly at today’s high prices, so many opt for a 3.5% down FHA mortgage or a 5% or 10% down conventional mortgage with private mortgage insurance. The federal reserve has done all it can to enable first-time homebuyers to borrow prodigious amounts, and despite industry spin, lending standards for first-time homebuyers are actually quite loose.

Over time, assuming first-time homebuyers don’t refinance or add more debt with a HELOC, they will build equity by paying down an amortizing mortgage, and hopefully, home price appreciation will give them a boost. With wage growth in the area, house prices should rise 3% or 4% per year, and presumably, the borrower will have a higher income as well. So after 5 to 7 years, a prudent homeowner will have sufficient equity to cover the closing costs of a sale and have 20% to put down for a move-up purchase.

What happens to the housing market if first-time homebuyer rates fall to record lows and remain there for many years? Over the next decade, we’re going to find out.


NAR Annual Survey Reveals Notable Decline in First-time Buyers

Media Contact: Adam DeSanctis / 202-383-1178

WASHINGTON (November 3, 2014) – Despite an improving job market and low interest rates, the share of first-time buyers fell to its lowest point in nearly three decades and is preventing a healthier housing market from reaching its full potential …

The long-term average in this survey, dating back to 1981, shows that four out of 10 purchases are from first-time home buyers. In this year’s survey, the share of first-time buyers* dropped 5 percentage points from a year ago to 33 percent, representing the lowest share since 1987 (30 percent). …

The lowest point in three decades? Ouch! And the NAr admitted this. Shocking!

U.S. Homeownership Rate Falls to Lowest Since Early 1995

By Prashant Gopal Oct 28, 2014no-house-for-you

The homeownership rate in the U.S. fell to the lowest in more than 19 years as the market shifted toward renting and tight credit blocked some potential buyers.

The share of Americans who own their homes was 64.4 percent in the third quarter, down from 64.7 percent in the previous three months, the Census Bureau said in a report today. The rate was at the lowest level since the first quarter of 1995.

Entry-level buyers have been held back by stringent mortgage standards and slow wage growth. The share of first-time buyers was 29 percent in September for the third straight month, compared with about 40 percent historically, according to the National Association of Realtors said.

“The homeownership rate hasn’t bottomed yet,” Paul Diggle, U.S. property economist for Capital Economics Ltd. in London, said in a telephone interview. “Something like 64 percent seems like a reasonable floor. But that floor is now in sight.”

The homeownership rate peaked at 69.2 percent in June 2004 and is close to the average of 64.5 percent from 1965 to 1999, data compiled by Bloomberg show.

The market since the latest recession has shifted toward rentals as millions of homeowners lost properties to foreclosure and potential buyers couldn’t afford to own a home or had trouble qualifying for loans. Demand for rentals sent leasing costs to records in some cities, spurred an apartment-construction boom and created a new industry of single-family landlords.

I_want_to_believeA crashing home ownership rate is one sign of the lack of first-time homebuyers. The foreclosure debacle was bound to cause some decline in the home ownership rate, but if those foreclosures would have been purchased by first-time homebuyers, the decline wouldn’t have taken us back to mid 90s levels.

And consider just how bad the first-time homebuyer rate really is. If the usual participation rate is 40%, and if the current rate is 29%, that’s 27.5% below normal. [(40-29) / 40 = 27.5%] The first-time homebuyer participation rate needs to increase by 40% to get back to where it was [(40-29) / 29 = 40%].

The numbers are even worse when looking at new home construction.

Some Builders Like New Mortgage Rules, But Toll Calls Them “Dumb”

By Kris Hudson, Oct 23, 2014

… Some home builders are heralding federal regulators’ move this week to ease mortgage-qualification standards  as a key to reviving the entry-level market but at least one is panning it as a return to dangerous lending.

The Federal Housing Finance Agency indicated this week it will expand mortgage availability with changes such as allowing borrowers to make a down payment of 3% of a loan’s value rather than the typical 20% for a high-quality mortgage.

This is a sign of just how desperate the government is to revive housing.propert_ladder_pressure

On Thursday, two national builders reporting quarterly results touted the change as key to bringing first-time buyers back into the market. First-time buyers accounted for an average of 29% of new home sales from 2001 to 2011, according to the National Association of Home Builders. But this year that figure has dropped to an estimated 16% , because of tepid job and wage growth, mounting student debt and tight lending standards.

The first-time homebuyer participation rate for new home construction is 45% below normal. [(29-16) / 29 = 44.8%] The first-time homebuyer participation rate needs to increase by 81% to get back to where it was [(29-16) / 16 = 81.25%].

So what does this dismal first-time homebuyer percentage mean? It means the move-up market is going to suffer from a lack of fundamental support for a very long time. Perhaps inventory manipulations may keep prices up, but sales volumes will necessarily suffer.

The number of first-time homebuyers determines the level of market activity at all price points because unless an existing homeowner has someone willing to buy their house, the chain of move-ups doesn’t function.

The move-up market is broken because potential move-up buyers don’t have the equity to make the move. Also, some speculate that current owners with low-rates won’t want to sell and give up their current mortgage; some will become long-term landlords even if they move.

Most move-up market sales get their equity from the profitable sale of a previous home. With the crash of house prices, those who bought over the last 10 years have no more equity than they originally put down, and many are underwater. This potential buyer pool is dead. As we know from the chart on originations, the number of buyers who purchased at the bottom is relatively small.


Plus, many more buyers than usual are either small investors or hedge funds. In a normal market about 35% of purchases are for investment (the inverse of a 65% home ownership rate). Over the last few years, about 50% of home purchases have been investors. Investors don’t sell their properties to complete a move-up trade, so 15% of the market that ordinarily would have been move-ups will not be over the next decade.bubble-money

As I pointed out in One man’s mortgage debt is an entire neighborhood’s equity, the equity that would otherwise be accruing to homeowners is instead recollateralizing the bad loans on underwater properties. With 25% of properties underwater, a huge portion of the move-up market won’t have equity because that money will instead be going to a bank.

With 15% of the move-up market removed by investors and 25% removed by recovering underwater loanowners, 40% of the demand for future move-ups is gone.

In reality, the move-up market has not been that robust over the last few years. Sales volumes are low, but since sales volumes at the low end are even worse, it looks good by comparison. Eventually, that will reverse as fundamental strength in the economy enables first-time homebuyers to return, and as the first-time homebuyer percentages improve, the move-up market will slowly recover.

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