Before delving into recent market developments, how- ever, let’s look at some historical trends for context. First-time homebuyers represent a transition in housing demand from rent to own, making them pivotal to the
purchase market. They also provide momentum for the rest of the
housing market by releasing home equity to homeowners to buy
their next home.
First-time homebuyers purchased an average of 1.8 million
single-family homes per year between 1994 and 2016. Some
35 percent of single-family homes sold are bought by first-time
homebuyers. First-time homebuyers are even more prevalent when looking at the purchase-mortgage market because
of their greater reliance on mortgage financing. Historically,
45 percent of new purchase loans go to first-time homebuyers.
Although first-time and repeat homebuyers face the same
macro-environmental factors, such as interest rates, their
purchase decisions are based on different economic and
demographic drivers. The delay in first-time homebuying
in the aftermath of the housing crisis and the size of the
population now reaching peak household-formation
age are two of the main drivers for the strong performance of the first-time homebuyer market over the past
The housing crisis left a large deficit in the first-time homebuyer market. Since 2007, first-time home-buyers averaged just 1.5 million a year, compared to
the 1.8 million annually pre-crisis. This means that 3
million first-time homebuyers went missing from
the housing market over the past 10 years. Not
only were the years between 2007 and 2015 below
historical averages, they were the nine worst years
in the first-time homebuyer market in the past
The homeownership rate among younger
households tells a similar story. Households
headed by people under the age of 35 crashed 7
points, from 42 percent in 2007 to 35 percent in
2016, leaving many would-be first-time home-buyers on the sidelines of the housing market.
Many of these buyers will come back to the
housing market, however, representing a
large source of future growth.
In fact, demographics for the first-time
homebuyer market have become more
favorable over the past five years as more
people move into peak household-
formation age. Birth cohort sizes — a
proxy for population size — of potential early first-time homebuyers
(people 25 to 34 years old), increased from 36. 4 million to 38. 9 million
between 2012 and 2017, according to data from the U. S. National Center for
That favorable trend should continue over the next five years, as
the cohort size of potential early first-time homebuyers is expected to
increase to 39. 9 million by 2022. During that same time, growth also
will rotate from early first-time homebuyers to late first-time home-buyers (people 35 to 44 years old). That group is expected to increase
from 33. 7 million in 2017 to 36. 4 million in 2022.
Analysis suggests the drivers for an upswing in first-time homebuyers
should last for the next few years, and recent data supports this view. Of
the 1.3 million-unit increase in single-family home sales between 2011
and 2016, 828,000 units, or 63 percent, were purchased by first-time
homebuyers. Over the past two years, first-time homebuyers accounted
for 85 percent of the growth in home sales.
In the purchase-mortgage market, the mix of first-time home-buyers is only exceeded by levels in 2009 and 2010, which were elevated
from the first-time homebuyer tax credit and a weak overall housing
market. Based on data from the first half of this year, 2.2 million first-time homebuyers are expected to purchase a home this year, making
2017 one of the top three years for the first-time homebuyer market.
The biggest challenge created by the growing first-time homebuyer
market has been the tightening in the housing market. The available
inventory of previously owned homes was down 8 percent year over
year during the second quarter of 2017, and the supply of existing
homes for sale has dropped to 4.2 months as of this past August, compared to 4. 8 months a year earlier.
Many of the homes absorbed by first-time homebuyers had been
vacant. This is one way the housing market adjusts to insufficient
supply — by using the available stock of housing units more efficiently.
Compared to the same period last year, the number of vacant housing
units for sale was down by 100,000 this past second quarter. This reduced
vacancy rates to 1.5 percent, the lowest level since 1994.
One would expect a bigger increase in new construction from the
homebuilding industry to alleviate this tightness, but that was not the
case until recently. Between 2012 and 2016, there was hardly any increase
in homebuilding activity at the “low” end of the market, or new homes
priced under $250,000.
Growth in the first-time homebuyer market is beginning to catch the
attention of the homebuilding industry. New single-family homes priced
between $200,000 and $250,000 — the segment popular with first-time homebuyers — was the fastest-growing segment this year, with
homebuilders reporting year-over-year growth of 33 percent. The volume increase remained modest at 13,000 units for the first half of the
year, however. For the full year, it is likely that homebuilders will add
20,000 to 30,000 units in that price range. Given that sales to first-time
Tian Liu has served as chief economist for Genworth Mortgage Insurance
Corp. since 2014. He is responsible for tracking and analysis of U. S. and regional
economic conditions. He created the company’s First-Time Homebuyer Market
Report and can be reached at firstname.lastname@example.org.
Continued on Page 60 >>
<< Pendulum continued from Page 57