Potential First-time Buyers Still on the Sidelines

First-time buyers accounted for 31% of  buyers who closed a sale in August 2017, according to the August 2017 REALTORS® Confidence Index Survey.¹  The share of first-time buyers has been improving, although slowly, from less than 30% in 2013. Many potential first-time buyers are still on the sidelines, evidenced by the share of households who own a home. As of 2017 Q2, the homeownership rate for the under 35 years old age group showed only a slight increase to 35.3% (34.3% in 2017 Q1), while the homeownership rate for the 35-44 years old age group showed a slight decrease to 58.8% (59% in 2017 Q1). In absolute numbers, there are six million fewer households who own homes among these age groups in 2016 compared to 2005.²

What might account for this trends? On the positive side, employment has been growing and interest rates have been at historic lows. On the negative side, difficulties in obtaining credit, steep price growth compared to income growth, and other factors such as student debt and delayed marriage account for why potential buyers have remained on the sidelines.

Sustained employment growth. The share of first-time buyers has been on a modest uptrend since 2014 amid sustained job growth and a low interest rate environment. Since February 2010, the economy has generated 16.2 million non-farm jobs, which has now offset the 8.7 million jobs lost during the Great Recession of 2008-2009. Over the past 12 months, 2 million jobs were created.

Low interest rates. Interest rates remain at an all-time low, amid a supportive monetary policy stance. The 30-year fixed home mortgage rate has stayed below four percent for the most part since 2015 and averaged 3.77% in August 2017. The Federal Reserve Board has raised the federal funds rate target four times starting in December 2015 which raised rates from 0%–0.25% to 1.00%–1.25%, but mortgage rates have not kicked up correspondingly. Economists do see interest rates moving up as the Federal Reserve winds down its $4.5 trillion of investments in mortgage-backed securities and Treasury securities starting in October 2017 at the rate of $10 billion a month. NAR’s Chief Economist Lawrence Yun forecasts 30-year fixed mortgage rates to average 4.2 percent in 2017 and 4.6 percent in 2018.³

Strong house price appreciation, lagging income growth. Although employment has been rising, incomes have not increased much, and income growth has lagged behind house price growth. Since January 2012, the year which can be considered as a breakout year for the housing market, home prices have increased by 68% as of July 2017, a four-fold increase compared to the 15% gain in median household income.

Lack of inventory of homes for sale because inadequate new construction explains in part why home prices have increased at a fast pace. Housing starts, although improving, have not kept pace with the 1.5 million estimated demand for units coming from net household formation (about 1.2 million) and units needed to replace obsolete or destroyed homes. With falling inventory, home prices have increased. As of August 2017, the median price of existing homes sold was $253,500, surpassing the peak median price of $229,500 in June 2006.

Financing Constraints. Although interest rates are low, putting in a downpayment appears to pose as a constraint to interested homebuyers. FHA insures mortgages with 3.5% downpayment, with corresponding borrower credit scores of as low as 580. However, borrowers pay a mortgage insurance premium for the life of the loan (85 basis points for loans less than or equal to $625,500 with mortgage term of more than 15 years⁴), which may pose as deterrent in obtaining an FHA loan for some borrowers. Fannie Mae and Freddie Mac have started offering 3% downpayment loans, but borrowers who put in 5% or less and who have less than 620 FICO score pay an additional 3.75%. According to Fannie Mae’s 2017 First Quarter Credit Supplement report⁵, the share of single-family business acquisitions with loan-to-value ratio of more than 90 percent has in fact declined from nearly 20% in 2013—2014 to 15% in 2015–2017.

NAR’s survey among its REALTORS® also shows that the share of first-time borrowers who put down 0% to 6% has declined from about 70% in 2009 to 57% in August 2017.

Most studies indicate that those who are educated are more likely to have higher incomes and to become homeowners own a home. Student debt, when applied wisely, is a good investment and pathway to a higher standard of living and homeownership. However, student debt has delayed a home purchase for many non-homeowners. According to NAR’s 2017 Student Loan Debt and Housing Report 2017, 83% of non-homeowners reported that their student debt has delayed them from buying a home. The median years of delay is seven years among non-homeowners.

Delayed marriage. Due to a host of factors, including economic reasons, men and women are postponing marriage. The median marrying ages for both men and women have been increasing since the 80’s, but the rate of increase appears to have accelerated after 2005. In 2005, the median marrying age for women was 25.3 years, while the median marrying age for men was 29.5 years. Everything else remaining the same, the delay in marriage has delayed homeownership by two years.

In summary, solid employment growth and a slow rise in interest rates provide a hospitable environment for potential first-time buyers. Income-based repayment for student loans will also ease the burden for potential first-time borrowers. Increasing supply and easing the access to financing are the key challenges facing potential homeowners.