2ND QUARTER 2019 – SUMMARY OF FINDINGS
This edition of the First-Time Homebuyer Market Report covers three trends in the first-time homebuyer market in Q2’19.
First, there was not a quick rebound in the first-time homebuyer market, and sales to first-time homebuyers continued to show a moderate decline. This came as a surprise because the overall housing market has seen a moderate rebound compared to Q4’18.
Second, housing affordability continued to improve, driven mainly by falling mortgage rates, but also was supported by faster wage growth and falling home price growth. While falling mortgage rates are the result of higher economic uncertainties, and could negatively affect buyer confidence, they are still a net positive for the housing market in Q2.
Third, low down payment mortgages remain at the core of mortgage financing for first-time homebuyers, who continue to shift away from government loan programs toward conventional loans with low down payments.
 Low down payment mortgages are mortgages with a down payment of less than 20 percent.
2Q 2019 KEY TAKEAWAYS
1. No quick rebound in the first-time homebuyer market.
In the past three quarters, overall home sales and sales to first-time homebuyers have slowed. First-time homebuyers purchased 559,000 single-family homes in Q2, down four percent from a year ago (Figure 1). This represents a shift in the housing market dynamic dating back to 2012.
For the first time, the year-over-year growth rate in home sales to first-time homebuyers underperformed the overall single-family housing market, which was down two percent year over year. Home sales to repeat buyers fell by one percent year over year, outperforming the overall market.
Removing the seasonality from the housing market data, home sales to first-time homebuyers declined by three percent from Q1 to a seasonally adjusted annual rate of 1.94 million units (Figure 2). Sales of single-family homes were flat during the same period. Due to improved housing affordability, the housing market has seen a moderate rebound since Q4, with overall sales up four percent. However, sales to first-time homebuyers have not seen a rebound, declining by six percent since Q4.
More states experienced slowdowns in the first-time homebuyer market in Q2. Compared to a year ago, 43 states reported slowdowns in Q2, compared to 39 states in Q1 (Figure 3).
Texas, North Carolina, Virginia, Missouri, Louisiana, Kentucky, Indiana, Hawaii, Delaware, and Oklahoma, which have all sustained growth up to this point, reported a declining first-time homebuyer market in Q2. Only nine states – Ohio, Pennsylvania, Mississippi, Maine, Maryland, Massachusetts, Connecticut, Arkansas, and Rhode Island – reported increased purchase activities by first-time homebuyers.
First-time homebuyers continue to represent a large part of the activities in the housing market. In Q2, they represented 36 percent of all buyers in the single-family housing market and 55 percent of new purchase borrowers (Figures 4 and 5).
2. Housing affordability is improving due to lower mortgage rates, slower home price growth, and faster income growth.
As a result of the simultaneous increase in interest rates and rapid home price growth, housing affordability has deteriorated in the past three years. This culminated in a slowdown in the housing market in Q4. That trend began to reverse in Q1 as the slower sales in the housing market cooled home price growth, and the expectation, now reality, of a reversal in monetary policy pushed down mortgage rates. The slowdown in home price growth and falling interest rates continued in Q2.
The Freddie Mac Primary Mortgage Market Survey® showed a 36-basis point drop in the 30-year conventional mortgage rate over the last quarter to 4.01 percent. However, the interest rate for first-time homebuyers remained 50-basis points higher at 4.51 percent (Figure 6).
Compared to Q1, first-time homebuyers have seen mortgage rates come down by 39 basis points. The 50 basis point gap between these two measures of interest rate is largely the result of timing. First-time homebuyers who locked in rates in Q2, but closed in Q3, will likely see lower rates and further reduction in monthly mortgage payments.
The year-over-year growth rate in home values, based on the Federal Housing Finance Agency’s Purchase-Only Index, slowed to under five percent in May compared to 5.1 percent in Q1. Quarter over quarter, home values increased, but the size of the increase was minor compared to the lower rates, resulting in a two percent decrease in mortgage payments (Figure 7).
Compared to a year ago, mortgage payments were up two percent, representing the slowest pace of increase since 2016. More importantly, income grew faster than mortgage payments, leading to improved housing affordability.
3. Low down payment mortgages remain crucial for first-time homebuyers.
First-time homebuyers remain highly dependent on affordable mortgage products and lower-priced homes. A 20% down payment is beyond what most first-time homebuyers can save before their peak household formation age of early to mid-30’s. That is why, historically, around 80 percent of first-time homebuyers have used some form of low down payment mortgages, and again this quarter (Figure 8).
Low down payment mortgages are a critical mortgage solution for first-time homebuyers, and are at the core of the mortgage industry.
Conventional mortgages with a low down payment, enabled by the private mortgage insurance industry, were the most widely used mortgage product for first-time homebuyers. They were used by 201,000 first-time homebuyers in Q2 (Figure 9), six percent more than last year. For the past five quarters, the low down payment conventional mortgage has been the leading mortgage product for first-time homebuyers, and accounted for 36 percent of all first-time homebuyer purchases.
The number of first-time homebuyers using government loans continued to shrink this quarter across all product categories. Altogether, 223,000 first-time homebuyers used some form of government loans in Q2, down nine percent year over year. Government loans accounted for 41 percent of first-time homebuyers. The biggest percentage decrease occurred in the VA program, which was down 22 percent year over year in Q2. FHA loans, which have traditionally been the loan product most used by first-time homebuyers, were down five percent year over year.
While the lack of a rebound in the first-time homebuyer market was a disappointment this quarter, the overall level of purchase activity by first-time homebuyers remained healthy at close to two million units. The potential economic opportunities from serving the first-time homebuyer market are important to the housing industry, accounting for 36 percent of all single-family home sales and 55 percent of purchase loans.
The improving housing affordability is a promising development that should make it more attractive for potential first-time homebuyers entering the market, especially in an environment of rising economic uncertainty. Access to low down payment mortgages remains at the core of mortgage financing for first-time homebuyers, and the success of private mortgage insurance in the past few years shows that private capital can play a bigger role in housing finance and support homeownership.
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.