During the second quarter of 2017, first-time homebuyers purchased 570,000 single-family homes, compared to 426,000 last quarter, marking the highest number of first-time home buyer purchases during a second quarter since 1999, which had 599,000, according to the First-Time Homebuyer Market Report from Genworth Mortgage Insurance.
While the number of single-family home sales increased by just 2% during the quarter from a year ago, purchase mortgage origination increased by 5%, and sales and mortgages made to first-time home buyers increased by 8%. This resulted in a higher first-time homebuyer mix in both markets.
First-time home buyers accounted for 36% of all single-family homes sold during the second quarter, up from 34% a year ago. In the mortgage market, they accounted for 57% of all purchase mortgages originated, up from 56% a year ago.
Historically, first-time homebuyers have accounted for 35% of single-family housing market and 45% of the purchase mortgage market.
“The rapid growth in the first-time home buyer market that began in 2015 continued into the second quarter.
“As the housing market matures, first-time home buyers are becoming an even more important source of growth,” says Tian Liu, chief economist for Genworth Mortgage Insurance. “Whether one looks at the three million missing first-time home buyers since 2007 or the historically low homeownership rate among young households, the potential growth opportunity remains large and will likely take years to play out. The current housing cycle will be defined by first-time home buyers.”
A key driver was an improved effort by home builders to build more single-family homes priced between $200,000 and $250,000, the segment most popular with first-time homebuyers. This was the fastest-growing segment for home builders, accounting for 36% of all homes purchased during the second quarter and 33% year-over-year growth.
However, while home builders have increased their focus on building homes within this price range, volume growth has still not caught up due to a low starting level, growing modestly by 13,000 units in the first half of the year.
“As first-time home buyers continue outpacing the rest of the single-family homes market, home builders have begun adjusting their products further down the pricing curve,” said Liu. “However, the growth in supply has not been sufficient enough to offset the supply-demand imbalance, leaving many potential first-time homebuyers still frozen out of the market.”
The supply shortage of new, affordable starter homes has also led to a sharp decline in vacant homes for sale, sending the homeowner vacancy rate during the second quarter into its lowest level since 1994, which Genworth Mortgage Insurance believes will continue to drive home price appreciation.
“While many forecasters predict that increased supply will stem home price appreciation, we believe a slowdown in home price appreciation will be unlikely in 2017 and 2018,” says Liu. “We do not believe that the strong growth in home prices is leading to another housing bubble. A key feature of housing bubbles is speculative demand. Today, first-time home buyers are out-bidding investors and cash buyers.”
First-time home buyers continued to rely on low-down-payment mortgages during the second quarter, financing 448,000 homes, or 78% of all purchases. This represents a year-over-year increase of 8%, exceeding the growth in the purchase origination market.
“Faster growth in the low-down-payment mortgage market is primarily the result of an expanding first-time home buyer market, rather than a relaxation of lending standards,” Liu says. “As long as the expansion in the first-time homebuyer market continues, low-down-payment mortgages will continue to outpace the rest of the mortgage market.”
The surge in home financing shows that first-time homebuyers are driving mortgage credit expansion, taking on mortgage debt to fulfill homeownership priorities, and shifting their debt appropriation away from other sources like student loans. Over time, this is expected to drive faster growth in the amount of outstanding mortgage debt, which has grown by just 1% to 2% in 2015 and 2016.
Among the low-down-payment products utilized by first-time homebuyers, conventional loans with 97% LTVs became more popular with both lenders and borrowers. Year over year, first-time home buyer purchases using private mortgage insurance increased by 163,000, or 17%.
As such, during the second quarter, 58% of growth in first-time home buyer purchases came from the private mortgage insurance market, compared to 9% coming from Federal Housing Administration (FHA) products. FHA and other government lending programs remain three times as large as they were in 2007 in terms of their exposure to the first-time home buyer market. Under the current policy, their share of the mortgage market is expected to grow because of their specialization in low-down-payment mortgages.