A generation is stuck in starter homes, but they’re gaining traction
Not quite a year ago, we called attention to a decline in repeat homebuyers. Contrary to popular opinion, the number of first-time homebuyers remains strong while the number of repeat homebuyers lags well below its historical average.
The most recent numbers show some improvements for repeat homebuyers, but we remain concerned that not enough current first-time homeowners are moving on from their first purchases. This generation stuck in starter homes may struggle to build wealth and make it difficult for first-time homebuyers to find affordable houses.
How severe is the problem?
The first-time homebuyers’ share of all government-sponsored enterprise and Federal Housing Administration loans increased from 57 to 60 percent between June 2016 and April 2017. First-time homebuyers have consistently represented at least 53 percent of the market since 2008 compared with less than 48 percent between 2001 and 2007.
The number of repeat homebuyers in the market has changed significantly over the past two decades. Repeat homebuyers are families who have lived in their first, second, or third home for a few years and who are in a position to buy a different (usually larger and more expensive) home thanks to their increased equity and higher earning power.
In 2001, there were 1.8 million repeat homebuyers in the market. Although their numbers declined until 2008, there were always at least 1 million each year. In 2009, however, there were just under 700,000 repeat homebuyers.
By 2015, this number had recovered to just over 900,000, and it has now reached 1 million in the latest 2016 data. That 2016 number is still 57 percent of the number from 2001.
So what happened to the number of first-time homebuyers over that same 14 years? There were 1.3 million first-time homebuyers in 2001,1.3 million in 2015, and 1.4 million in the latest 2016 numbers. The numbers varied throughout period but much less so than for repeat homebuyers.
What’s getting in the way of repeat homebuyers?
Since the 2008 crisis, all borrowers have faced a tighter credit environment and home prices that have still yet to recover to precrisis levels. These conditions may have affected first-time and repeat homebuyers differently.
The basic strategy for buying a starter home is to establish a strong credit history and a stable income and save enough money for a down payment on what is often a more inexpensive home. The tight credit environment makes qualifying for the loan trickier, but for a buyer with reliable employment, saving for the smaller down payment that a starter home requires remains feasible, and lower home prices have reduced the amount of money needed.
The basic strategy for moving up from a starter home to a bigger home, however, has been to accumulate equity in the home through consistent price appreciation and then convert that equity into the down payment for a more expensive home. Traditionally, borrowers could afford the higher payments on the larger mortgage because their incomes were rising. But falling home prices during the financial crisis have eroded this equity, and most homes are still worth less than their 2007 peak.
Recent price increases have improved this situation: home values nationwide are within 1.5 percent of peak values. At the same time, real incomes have been flat since the mid-1990s, and credit standards are tight, further limiting trade-up activity.
Recent increases in mortgage interest rates are compounding this trend with a “lock-in” effect, where homeowners with ultra-low rate mortgages may be unwilling to see their mortgage costs go up as they trade up. Moreover, US households have experienced a secular decline in mobility since the 1980s, which will further depress the repeat homebuyer market.
Repeat homebuyers are part of a healthy housing market
First-time homebuyers and repeat homebuyers enter and sustain the housing ecosystem in different ways. If first-time homebuyers don’t ultimately move on, becoming repeat homebuyers, the next wave of first-time homebuyers will have challenges finding appropriately-priced starter homes. So it’s important to look at both sectors, and for policymakers to focus their attention on where the real challenges lie.
Currently, first-time homebuyers represent a higher percentage of the market than they did before the financial crisis. This group is not struggling. Homebuyers who bought before the boom, who hoped to cash in on price appreciation and trade up to their dream home, are struggling to gain back their share of the market today.
And while the number of repeat home buyers is rising, we still need to remain focused on aiding this generation stuck in their starter homes.
Photo by Naga Film/Getty Images.