4TH QUARTER 2019 – SUMMARY OF FINDINGS
In this edition of the First-Time Homebuyer Market Report, we’ll take a look at the following dynamics from the fourth quarter of 2019:
- The first-time homebuyer market was very active in Q4, finishing another historically strong year. The number of first-time homebuyers showed strong year-over-year growth, at a pace not seen since the peak of the last housing cycle in 2006. For the third consecutive year, the number exceeded 2 million, which is unprecedented in the past 26 years. But the deep trough created by the Great Recession and the Housing Crash means that the number of first-time homebuyers for the decade remains below the historical average and the previous decade, leaving room for further cyclical recovery. Today, first-time homebuyers make up a significant segment of homebuyers and more than half of purchase mortgage borrowers. The housing industry cannot afford to ignore this market segment.
- First-time homebuyer demographics are maturing. Growth will likely shift from first-time to second-time homebuyers. This may suggest a turnaround in homeowner mobility, which has been depressed this cycle. It will be a significant shift for the housing market. A recovery in homeowner mobility is even more important for the broader economy and indeed the whole society, since it implies greater dynamism and more opportunities. As housing demand transitions from entry-level homes for first-time homebuyers to “move-up” homes for second-time homebuyers, home price growth could follow by moving upmarket.
- Over the past five years, first-time homebuyers have been moving to places with strong job growth and affordable homes. First-time homebuyers are building their career in the middle of a strong job market. It is no surprise that they are headed to places with strong job growth. But strong job markets tend to drive up home prices which dampen housing affordability. That is why many first-time homebuyers have ended up in places with strong job growth and medium housing affordability. For the housing industry and policymakers, focusing on markets with the most acute affordability challenges and the most dynamic job markets will likely yield the most results.
- Low-down payment conventional mortgages backed by private mortgage insurance have become the leading product for first-time homebuyers for the second consecutive year. Low-down payment mortgages remain at the core of mortgage financing for first-time homebuyers. The tremendous market opportunity from the larger Millennial generation, their transition into homeownership and need for mortgage credit, and the increase in mortgage credit risk in the housing finance system are all connected, and demographic in nature. Mortgage credit risk, which has increased, may moderate or even recede once first-time homebuyers accumulate more home equity.
- Housing affordability continued to improve. Rates stabilized in November and December but ended lower compared to Q3 and a year ago, benefiting first-time homebuyers. In 2019, housing supply not only expanded, it expanded where it is needed the most: in the $200,000–$250,000 price segment. Partly due to expanded supply, home price growth slowed for the first time since 2014
Let’s dig into each of these topics a bit more…
 Low-down payment mortgages are mortgages with a down payment of less than 20 percent.
4TH QUARTER KEY TAKEAWAYS
1. The first-time homebuyer market was very active in Q4, finishing out another historically strong year.
First-time homebuyers purchased 517,000 single-family homes in Q4 (Figure 1a), up six percent from a year ago. Adjusting for seasonality, the number of first-time homebuyers also showed strong momentum, reaching seasonally adjusted annual rates of 2.19 and 2.18 million in Q3 and Q4 (Figure 1c), respectively – their fastest pace since 2006. A stronger second half pushed the first-time homebuyer market to a strong full year result of 2.09 million (Figure 1b), an increase of just under one percent. The moderate full year growth reflected in part a very strong first-time homebuyer market in 2018, as well as a slower first-half.
At a broader view, the housing market is in the middle of a multi-year boom in the first-time homebuyer market. The market has exceeded 2 million first-time homebuyers each year for the past three years, which is unprecedented in the past 26 years. In part, this represents a long overdue rebound from the trough earlier in the decade. Between 2010 and 2012, the number of first-time homebuyers averaged just 1.29 million a year, which were the three worst years for first-time homebuyers during the past 26 years due to high unemployment and dislocations in the housing market. There’s also reason to think this boom isn’t over. Even after three strong years, there were 2.2 million fewer first-time homebuyers in the 2010s compared to the decade of 2000s. Historically, the number of first-time homebuyers has averaged 1.8 million a year, or over 18 million over a decade, which means that there is a strong likelihood that the decade of the 2020s will see more than 18 million first-time homebuyers.
First-time homebuyers continue to represent a substantial part of overall activity in the housing market. In Q4, they represented 39 percent of all buyers in the single-family housing market (Figure 2a) and 55 percent of all purchase money borrowers (Figure 2c). For the full year, first-time homebuyers represented 38 percent of all homebuyers in the single-family housing market (Figure 2b) and 56 percent of all purchase money borrowers (Figure 2d). That means 38 percent of the customers of realtors and 56 percent of the purchase customers of mortgage lenders were first-time homebuyers in 2019.
2. As first-time homebuyer demographics mature, growth will likely shift from first-time to second-time homebuyers.
Demographics continue to be a positive factor for the first-time homebuyer market, but Millennials (like everyone else) are getting older, and that means their demand is expected to change. The millennial generation includes people born between 1984 and 1996. That means they are between the ages of 24 and 36 this year, with the peak of population at 29-30 (Figure 3). In 2025, there will not be any Millennials under the age of 30, which means that the youngest millennials will be over 30 in the next five years, and the peak of this population will rise to 34-35. The size of the 25-29 age cohort will shrink over the next five years, while the size of 30-44 age cohort will expand. In fact, the center of the Millennial population has been shifting into their early-30s over the last 5 years and is expected to shift into late-30s and early-40s over the next 5 years. The 40-44 age group should see the biggest population increase, with an increase of around 1.5 million. The 35-39 age group also will see a big increase in population, with an increase of around 1 million.
How will the aging of millennials affect the homeownership rate and the size of the first-time homebuyer market over the next five years? One key fact in this puzzle is that between the ages of late-20s to early-40s, the homeownership rate increases from 40 out of 100 to 60 out of 100. The aging of the Millennial population implies that the increase in first-time homebuyers over the age of 30 will likely lead to an overall increase in the number of first-time homebuyers in the 25-44 age group on the order of 580,000 first-time homebuyers over five years. The biggest increase in the number of first-time homebuyers will likely come in the 40-44 age group, with an increase of 450,000 first-time homebuyers over five years, followed by the 35-39 age group, with an increase of 260,000. At the same time, we will likely see fewer first-time homebuyers in their late-20s.
In addition to contributing to the first-time homebuyer market, many Millennials will likely be moving and buying a home for the second time. One measure of the potential number of second-time homebuyers is the cumulative number of first-time homebuyers from the previous 5-10 years. Many studies have indicated that the average homeowner will stay in the same home for 5-10 years. As they find new jobs, have children, accumulate home equity, and earn higher income, these homeowners will likely choose to move to a home that is more suited to their housing needs. This measure suggests that the rapid increase in the first-time homebuyer market will eventually lead to a bigger base of potential second-time homebuyers.
What is interesting from this approach is that it shows that the sharp drop in the number of first-time homebuyers between 2007 and 2011 has a very long-lasting effect on the entire housing market. The pool of potential second-time homebuyers has been shrinking without interruption in the past 10 years and may be a significant new explanation for the flat repeat-buyer market in the current housing cycle. At the trough of the housing cycle in 2011, the number of potential second-time homebuyers was 12 million (Figure 4). Seven years later, that pool has shrunk to 8 million. Therefore, the number of second-time homebuyers would have faced a very strong downward pressure even without a lower propensity for people to move. In fact, a flat repeat buyer market in a shrinking pool of second-time homebuyers suggests that the propensity of homeowners to move has increased, which is a more reasonable argument. According to this analysis, 2018 may be the trough in the potential second-time homebuyer market. The second-time homebuyer market will likely enjoy a strong tailwind thanks to the strong recovery in the first-time homebuyer market since 2014. Between 2018 and 2024, this analysis suggests an increase of three million in the number of potential second-time homebuyers. If this analysis is correct, the housing market will likely experience an expansion in the number of second-time homebuyers and as a result, the housing cycle will have a strong second act and the cycle will be very durable. The maturing of the first-time homebuyer demographics will likely have other implications for the housing market. For example, second-time homebuyers will likely be interested in homes at a higher price point, which could mean that the hottest homes on the market will shift upmarket.
In 2019, the number of repeat buyers grew by two percent to 3.4 million, exceeding the growth rate in the first-time homebuyer market. It is probably too early to know if the repeat homebuyer market is poised for a return to growth. The trend we identified back in 2017 remains: the repeat homebuyer market is essentially flat between 2013 and today, even under favorable conditions in the housing market.
The accelerated growth in the first-time homebuyer market was widespread in Q4, with a total of 48 states plus Washington D.C. and Puerto Rico (Figure 5b) reporting more first-time homebuyers compared to the same period a year ago, and only two states (Vermont and West Virginia) reporting lower numbers of first-time homebuyers. In addition, eleven states, including Washington and California, reported growth rates above 10%. For the full year, 28 states reported higher numbers of first-time homebuyers, with Wyoming being the only state to report a growth rate over 10% (Figure 5a). A total of 24 states reported lower numbers of first-time homebuyers, with Vermont reporting the biggest decline of 7%.
3. Over the past five years, first-time homebuyers have been moving to states with strong job growth and affordable homes.
Most states have seen strong growth in the first-time homebuyer market during this period, which contributed to a national growth rate of over 40 percent. States are divided into three groups of equal size based on job growth rates between 2014 and 2019. The states in the group with the fastest job growth saw on average cumulative growth rates of 12 percent over five years, while states in the group with the slowest job growth saw job growth rates of just two percent during the same period. Similarly, states are divided into three groups of equal size based on housing affordability in 2018. Housing affordability measures the degree to which a typical middle-income family can afford the mortgage payments on a typical home. The typical middle-income family from the least affordable states can afford 119 percent of the median-priced homes in their state, compared to 210 percent in the most affordable states. There is an interesting interaction between job growth and housing affordability. Faster job growth tends to make housing less affordable. For example, most states with slow job growth have either medium or high housing affordability. Only two states, Alaska and Wyoming, have both slow job growth and low housing affordability. The most economically dynamic states, which also have the fastest job growth, also tend to have lower housing affordability. Only one state, Arkansas, has both high job growth and high affordability (Figure 6).
 The housing affordability index from Moody’s Analytics is used here. Values from 2018 are used here because they represent the most recent full-year available.
States with faster job growth during this period reported faster growth in the first-time homebuyer market (Table 1). Overall, states with fast job growth reported first-time homebuyer growth rates of 44 percent between 2014 and 2019, compared to the 37 percent growth rate for states with slow job growth. This result also holds true for states with both low and high housing affordability. For first-time homebuyers, the best option appears to be a state with fast job growth and medium housing affordability. States including Georgia, North and South Carolina, Tennessee, and Texas belong to this group.
4. Low-down payment mortgages remain at the core of mortgage financing for first-time homebuyers.
A 20 percent down payment is beyond what most first-time homebuyers can save before their peak household formation age of early to mid-30s. That is why, historically, a large majority of first-time homebuyers (80%) have used some form of low-down payment mortgages, including conventional, FHA, VA, and USDA loans (Figure 7). In 2019, 1.66 million first-time homebuyers used some form of low-down payment mortgage, up one percent from 2018. It was the second biggest year for the low-down payment mortgage market in history. By comparison, only 426,000 first-time homebuyers put down at least 20 percent of the purchase price.
Low-down payment conventional mortgages backed by private mortgage insurance have become the leading product for first-time homebuyers for the second consecutive year. Growth in the low-down payment mortgage market is driven by conventional loans backed by private mortgage insurance, especially loans with a three percent down payment. Among three percent down payment conventional purchase loans, over 90 percent go to first-time homebuyers. Growth in that market has made the private mortgage insurance industry the leading source of mortgage credit enhancement for first-time homebuyers for the second consecutive year – financing 720,000 first-time homebuyers in 2019 (Figure 8a), up five percent from a year ago. The private mortgage insurance industry insured 98,000 more first-time homebuyers than the Federal Housing Administration in 2019. At the end of 2019, over $1.2 trillion of single-family mortgages have insurance coverage from the private mortgage insurance industry, representing almost 11 percent of the total mortgage debt outstanding. That is up from under seven percent five years ago.
Demographics and a strong labor market have helped to create a boom in the first-time homebuyer market and a historically large market for low-down payment mortgages. That boom in low-down payment mortgages also means an increase in the amount of credit risk in the housing finance system. The tremendous market opportunity created by the larger Millennial generation, their transition into homeownership, their need for mortgage credit, and the increase in mortgage credit risk in the housing finance system are all connected. As noted earlier regarding the potential rise of second-time homebuyers, the increased credit risk will likely be temporary as homeowners accumulate home equity.
5. Housing affordability continued to improve due to lower mortgage rates and slower home price growth.
More than any other factors, lower interest rates and slower growth in home prices have helped improve housing affordability in 2019. Compared to a year ago, the Freddie Mac Primary Mortgage Market Survey® showed that the 30-year conventional mortgage rate has decreased by 108 basis points to 3.7%, while the interest rate for first-time homebuyers decreased by 114 basis points to 3.9%, the lowest level since Q4 2016 (Figure 9). The lower rates have meant significant savings for first-time homebuyers. On a $250,000 loan with a 30-year term, a 114 basis points decrease in interest rate means a monthly savings of $169, a very significant increase in housing affordability.
In addition to lower mortgage rates, housing affordability also improved as homebuilders began to address the large market opportunity in the affordable housing market segment. For example, the fastest-growing segment for new homes in 2019 are those priced between $200,000 and $250,000, which increased by 30 percent in one year. More broadly, building activity expanded by 16 percent in the $200,000 to $400,000 price range, leading to the fastest growth in new homes sold since 2016. The increased supply is expected to shift home sales to new construction and reduce the inventory pressure in the previously owned market and pressure on home prices. The year-over-year growth rate in home values, based on the Federal Housing Finance Agency’s Purchase-Only Index, was unchanged at 4.9% in Q4 compared to Q3. Quarter over quarter, home values were up slightly. As a result, total mortgage payment decreased by eight percent from a year ago (Figure 10).
The first-time homebuyer market enjoyed a strong quarter and a historically strong year. For the third consecutive year, the number of first-time homebuyers exceeded 2 million, unprecedented in the past 26 years. This is a tremendous market opportunity for the entire housing industry. Many in the homebuilding industry are actively expanding housing supply to address this opportunity, while on the financing front, the private mortgage insurance industry is supplying mortgage credit and taking on the credit risk.
First-time homebuyer demographics are maturing. Moving forward over the next 3-plus years, growth will likely shift from first-time to second-time homebuyers. This may suggest a turnaround in homeowner mobility, which has been depressed in recent years. It may be that this lack of mobility is the result of the sharp contraction in the first-time homebuyer market. The strong recovery in the first-time homebuyer market has already increased the pool of potential second-time homebuyers, and we will likely see that showing up in market activities in the coming years, creating a prolonged housing cycle as well as a change in growth opportunities for the housing industry. The resulting increase in homeowner mobility will likely be very significant both economically and socially.
The tremendous growth in the first-time homebuyer market over the past five years shows that first-time homebuyers have been busy building careers, and places with abundant job opportunities also are very attractive to first-time homebuyers. But the sheer size of the market and the delay in expanding the housing supply have made those markets less affordable. Markets with abundant job opportunities and acute affordability challenges also are markets with the most opportunities to expand supply. In the meantime, first-time homebuyers may have to find their ideal balance between job opportunities and housing affordability.
Tian Liu has served as Chief Economist for Enact Mortgage Insurance Corporation since 2014. He is responsible for tracking and analysis of U.S. and regional economic conditions. He authors the company’s Weekly Economic Report and provides regular updates on housing and mortgage markets.
Mr. Liu began covering the U.S. housing market in 2007. His commentary on the housing market has appeared in the Wall Street Journal, New York Times, CNBC, Washington Post, and other notable publications.
Mr. Liu has a Masters in Economics from the University of Chicago and an undergraduate degree in Economics from the Australian National University. He resides in Raleigh, North Carolina, with his wife and two children.
About Enact Mortgage Insurance
Enact Mortgage Insurance, an operating segment of Genworth Financial, Inc. (NYSE: GNW), is headquartered in Raleigh, North Carolina, and operates in all 50 states and the District of Columbia. Enact Mortgage Insurance works with lenders and other partners to help people responsibly achieve and maintain the dream of homeownership by ensuring the broad availability of affordable low down payment mortgage loans. Enact has been providing mortgage insurance products and services in the U.S. since 1981.