First-time homebuyers face a difficult housing market: high prices, low supply, tight credit, and renting costs that make it difficult to save for a down payment. But compared with repeat buyers, first-timers have dominated the mortgage market for the past 10 years, and their share today is still high. We don’t see this changing anytime soon.
The Federal Housing Administration (FHA), which makes low–down payment loans available to borrowers with less than perfect credit, has typically focused on the first-time homebuyer market, with first-timers making up about 80 percent of their total originations. That share fell to around 75 percent during the recession but has slowly crept up to nearly 83 percent today.
The government-sponsored enterprises’ (GSE’s) share of first-timers was much lower than the FHA’s historically—about 25 percent during the early 2000s—but it increased to about 40 percent during the housing bubble. After falling slightly during the recession, the GSE share of first-timers has been on a sustained upswing since 2013 and is just shy of 50 percent today.
Combining the FHA and the GSEs, the total share of first-timers taking out purchase mortgages in 2017 was about 60 percent, about 20 percentage points higher than the 40 percent pre-crisis average.
Why has the share of first-time homebuyers surged since the housing crisis?
Partly, it’s the better economy. But a big chunk of the increase is driven by the pullback of repeat buyers.
Between 2001 and 2007, repeat buyers accounted for anywhere from 1.4 to 1.8 million home purchases a year while first-timers were responsible for between 900,000 and 1.3 million. Today the two have traded places: in 2017 repeat buyers were responsible for just over 1 million home purchases while first-time buyers bought close to 1.5 million homes. What caused this shift?
Falling house prices during the recession prevented millions of homeowners from accumulating equity in their homes, equity they have typically used to trade up to bigger homes. Since home prices have rebounded in recent years and home equity is again on the rise, will we finally see repeat buying activity return to historic levels? Probably not.
Although homeowners have more equity today, most of them also have ultra-low-rate mortgages they locked in during the recession, when rates were consistently below 4 percent. Today, mortgage rates are closer to 4.6 percent. If a homeowner with a 3.5 percent rate were to trade up to a bigger home, it would come with a new mortgage at the prevailing, higher market rate.
So homebuyers looking to use their home equity and take on no additional debt to fund a move to a bigger home would pay several hundred dollars extra every month because of the higher rate. On a $300,000 mortgage, they would be paying $200 extra every month, or $2,400 a year.
What does this mean for homebuyers?
Because homebuyers typically take on additional debt when they upgrade, the actual increase in the mortgage payment for anyone upgrading would be much bigger. Plus, the more rates rise in the coming years, the bigger the interest rate difference will become and the more money trade-up buyers will have to pay for interest alone.
Many homebuyers will likely find it much more economical to simply stay in their existing homes. This will continue to dampen repeat buying volumes and continue the dominance of first-time homebuyers in the housing market.
Since existing homeowners won’t release their starter homes into the market, and since we aren’t making up for that deficit through new construction, prices will likely keep going up for first-time homebuyers.