What's behind the decline in first-time homebuyers?
First-time homebuyers are the lifeblood of our current housing system. They allow existing homeowners to sell and move to a new town, a retirement community, or to the bigger house next door. It’s no surprise, therefore, that a recent National Association of Realtors (NAR) study showing a decline in the percent of first-time homebuyers from 2013-2014 triggered concern and dramatic headlines. In a new brief, we use new publicly available data to take a more detailed look at first-time homebuyers in the US and confirm that there was a decline in their share, from 57 percent in 2011 to 54 percent in 2014. But when we separated mortgages backed by the Government Sponsored Enterprises (GSEs) and the Federal Housing Administration (FHA), we found that the share of first-time homebuyers actually went up within those pools. Our conclusion: the source of the overall decline in first-time homebuyers is a decline in FHA-insured mortgage originations, which are primarily made to those borrowers.
For our deeper dive, we examined principal-residence purchases financed with GSE and FHA mortgages, focusing only on principal-residence purchases, where most new buyers are concentrated (Figure 1). We compared our analysis with the NAR analysis, which examined a significantly smaller group of homebuyers and included all-cash purchases and loans made for investment properties and second homes.
The overall share of the first-time homebuyers among combined pools of enterprise and FHA purchase borrowers dropped from 57 percent in 2011 to 54 percent in 2014. While the magnitude of the decrease differs, the decline is consistent with the NAR’s identification of a recent plunge.
Examined separately, however, the GSE-only and FHA-only pools show a slight increase. The GSE’s first-time homebuyer share peaked at 42 percent in 2007 and fell to 38 percent between 2008 and 2012, partly due to elevated GSE refinance activity. Since early 2013, the GSEs’ refinance activity fell as interest rates rose, and in 2014, the first-time homebuyer share bounced back to 42 percent. The share of first-time homebuyers among FHA-insured purchase loans has always fluctuated around 80 percent and stood at a high of 81 percent in 2014.
If both FHA and GSE’s first-time homebuyer shares are rising, what’s causing their overall market share to go down?
Figure 2 shows the changes in the loan-count composition of all first-lien purchase-money mortgage originations for principal residences in the US over time. Following the crisis, the FHA share of the purchase mortgage market mushroomed from 6 percent in 2007 to over 40 percent in 2010. This increase in FHA lending pulled the overall first-time homebuyer share up. As FHA insurance premiums rose significantly from 2011 to 2014, however, more borrowers shifted to conventional loans; as a result the FHA market shrank to 23 percent in 2014. Consequently, the overall first-time homebuyer share declined from 57 percent in 2011 to 54 percent in 2014, even though FHA and the GSEs’ shares edged up in the same period.
The good news is that as the economy recovered from the housing crisis, the first-time homebuyer shares for the FHA and the GSEs increased in 2014. Our analysis also makes clear, however, that problems with FHA means problems primarily for first-time homebuyers. FHA is the critical tool for providing starting access to homeownership for American families. We’ll be watching closely with all stakeholders in the housing industry to see if the recent reduction in FHA premiums has the intended impact of bringing back hundreds of thousands of new borrowers to the FHA.