The American Enterprise Institute's (AEI) International Center On Housing Risk has released a new First-Time Buyer Mortgage Share Index (FBMSI) showing that first-time home buyers represented 46% of all home sales during the one-year period ended Oct. 31.
The finding is a surprise considering that the leading data and analytics firms including the National Association of Realtors (NAR) have reported in recent months that first-time home buyers comprise about 36% of all home sales – far below the historical norm of around 40%.
AEI says its report is a new objective and transparent measure of the share of mortgages going to first-time buyers. The organization also announced an index to measure the risk of those loans, the First-Time Buyer Mortgage Risk Index (FBMRI).
The agency FBMSI, which measures mortgages guaranteed by government agencies, averaged 52% over the 12 months ended Oct. 31. The combined FBMSI, which includes both government-guaranteed and private-sector mortgages, averaged an estimated 46% over the same period.
‘Discussions about homeownership and credit availability are hampered when not grounded in good measurements of loan availability and risk,’ says Edward Pinto, co-director of the AEI's International Center On Housing Risk, in a statement. ‘We developed these new tools to provide accurate information to help inform the conversation.’
AEI says this is the first time the national first-time buyer share has been calculated using a nearly complete dataset with minimal opportunity for sample error. This is in contrast to the 2014 survey conducted by NAR, which was based on responses constituting only 0.2% of all purchase loans originated during the 12-month survey period and was voluntary, with responses received from only 9% of those mailed the 127-question survey.
For the July 2013 to June 2014 period covered by NAR's survey, the center's combined FBMSI had an average value of 45%, substantially higher than NAR's survey finding that first-time home buyers constituted 36% of purchase loans used to buy a primary residence.
‘It is not surprising that the NAR results, which are based on a small and non-random sample, provide an inaccurate picture of the importance of first-time home buyers,’ says Stephen Oliner, also a co-director of the AEI's International Center On Housing Risk. ‘The FBMSI is as comprehensive as currently possible and will hopefully allow a discussion of the facts on this important issue.’
AEI's FBMRI stood at 14.56% in October, up slightly from the average for the prior three months, but up nearly 1 percentage point from a year earlier. The FBMRI is about 3 percentage points higher than the composite National Mortgage Risk Index (NMRI) and about 6 percentage points higher than the repeat home buyer NMRI.
The higher risk for the mortgages taken out by first-time buyers is largely due to risk layering. In October, two-thirds of first-time buyer mortgages had a combined loan-to-value ratio of 95% or higher, and 96% had a 30-year term.
Facing the combination of little money down and slow amortization, these buyers will have very little home equity for a number of years unless their house appreciates substantially. In addition, about one-fifth of first-time buyers taking out mortgages had a FICO score below 660, the traditional definition of subprime mortgages.
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