First-Time Homebuyer Market Report
By Tian Liu, Enact Mortgage Insurance’s Chief Economist
Findings for Full-Year 2020
Despite 2020 containing both a global pandemic and a deep recession, the U.S. housing market ultimately staged an unexpected and strong rebound in the second-half of 2020, resulting in a record number of first-time homebuyers and a strong increase in the number of repeat buyers. The COVID-19 pandemic, which began during the first quarter of 2020, increased preference for homeownership as homes have and in most cases are still serving as shelter, office, and classroom. Lower interest rates made homes more affordable, while reduced spending on personal services, travel, and leisure have increased the share of expenditure available for housing. The pandemic also created a shift in housing preference among existing homeowners, and many borrowers purchased homes in different locations and with different features that better suited their new reality. Out of 2020 came a housing boom with rapidly rising home prices and a new construction boom in single-family homes.
Record Sales to First-Time Homebuyers
For the full year, 2.38 million Americans became first-time homebuyers, which is 14 percent higher than the same period a year ago (Figure 1a). This comes after three years of strong first-time homebuyer market activity, when the number exceeded 2 million each year. As we have noted in previous editions, there is a strong demographic foundation for this strength, as the largest cohort in history, the Millennial generation, is reaching its early-thirties, their peak homebuying ages. There also is a strong cyclical foundation for the strength in the first-time homebuyer market since as many as three million delayed purchasing their first homes in the aftermath of the 2008 – 2009 recession. In addition to these factors, the first-time homebuyer market also likely benefitted from better affordability due to falling interest rates. At the end of the fourth quarter, the first-time homebuyer market ended with a total of 657,000 single-family home purchases (Figure 1), up 26.4% from a year ago.
Adjusting for seasonality, the number of first-time homebuyers increased by 6.8% from the previous quarter to a seasonally-adjusted annual rate of 2.76 million in Q4 (Figure 2) – a new record. The strength of the first-time homebuyer market was impressive whether measured in growth rate or in number, especially considering that the economy was still in the middle of a pandemic and recession. The momentum continued throughout the quarter, as the number of first-time homebuyers stayed over 200,000 purchases per month even in November and December, typically two slower months in the quarter for home sales. Remarkably, the first-time homebuyer market had a record year in history, equaling its previous record in 1999.
The pandemic also increased housing demand in other ways:
- Working from home, remote learning, and other social distancing measures have forced homes to become the end all, be all, ultimately resulting in an increase in a home’s value to homebuyers
- Large expenditures on travel, leisure, entertainment, and personal services have decreased significantly throughout the pandemic, freeing up disposable income to be used toward housing
- While the unemployment rate has increased overall, it has increased less for higher income earners who are more likely to become potential homebuyers – so the job losses have had less effect on housing
- Potential homebuyers may have benefitted from pandemic-related forbearance programs on student loans, credit cards, and auto loans, temporarily reducing debt repayment for some
- The real estate and the housing finance industries have successfully maintained the functioning of the housing market by reducing the number of face-to-face interactions in homebuying, selling and financing
- The forbearance program in the mortgage industry prevented potential foreclosures by borrowers impacted by the pandemic and helped stabilize the housing market
- Fiscal stimulus under the CARES Act helped to maintain spending and income levels, which prevented spillover from the public health crisis into a broader economic and housing crisis
Many of the factors listed earlier increased housing demand not just from first-time homebuyers, but from all potential homebuyers. As a result, it is difficult to say which homebuyer segment should increase more in demand. However, the latest data supports that a larger proportion of American families have become homeowners during 2020. The Census Bureau’s Housing Vacancy and Homeownership Survey has shown that as of the fourth quarter of 2020, the homeownership rate among the under-35 age group has increased by 0.9 percentage points to 38.5% from a year ago (the highest level since 2010) and the homeownership rate among the 35 to 44 age group has increased by 0.6 percentage points to 61 percent. The transition into homeownership also has an important impact on the overall household balance sheet, with the growth rate of mortgage debt outpacing the growth rate of student debt for the first time since at least 2004. The increased preference for homeownership is not limited to younger households but applies to households headed by people from a wide range of age groups. This suggests that demand also increased from repeat homebuyers.
For repeat buyers, home purchases are often triggered by changes in work (such as a job relocation, a promotion) or life situations (more children, a different school district). Activity in the housing market this quarter continued to reflect the new realities in both work and life during the pandemic. What it means to be in a “better location,” one of the fundamental drivers of value in real estate, has shifted as a result of the pandemic. Better locations are more likely further away from the office because greater flexibility to work from home has made commute time a less important factor. Property features such as additional rooms to function as an office, classroom, or a guest bedroom have become more valuable. The simultaneous increase in housing demand from first-time and repeat buyers has resulted in a housing boom with demand outstripping supply. According to the National Association of Realtors, the inventory of previously-owned homes on the market fell by 400,000 units to 1.06 million units between September and December 2020, resulting in the supply of homes for sale decreasing from 2.7 months of sales to 1.9 months of sales during the same period.
The large shift in homeowner preferences means that many homeowners are no longer satisfied with their existing homes. While renovations and remodeling can work in some cases, purchasing a different home is often necessary. When preferences among a large number of existing homeowners change, it can result in a surge in repeat buyer activity, which happened in the fourth quarter. Compared to the first-time homebuyer market, the repeat buyer market reported even stronger growth in the fourth quarter of 2020, increasing by 44 percent from the prior year to 970,000 units in the fourth quarter. For the full year, repeat buyers purchased a total of 3.51 million homes, which is an increase of four percent over 2019. Adjusting for seasonality, the number of repeat homebuyers increased by seven percent from the previous quarter to a seasonally adjusted annual rate of 2.16 million, which represented the best quarter since Q4’07.
The percent of home sales going to first-time homebuyers was unchanged from the previous quarter at 40 percent in Q4’20 (Figure 3). The first-time homebuyer segment remains important to the housing market and the mortgage market. In the purchase mortgage market, first-time homebuyers represented 56 percent of purchase loan borrowers in Q4 (Figure 4), also unchanged from Q3. For the full year, first-time homebuyers represented a higher percentage of homebuyers (40% vs 38% in 2019) in the single-family housing market (Figure 3a), and a higher percentage of purchase loan borrowers (56% vs 55% in 2019) in the mortgage market (Figure 4a).
Lower Mortgage Rates Still Supporting Housing Affordability
The factors that strongly supported housing demand in Q4 and 2020 overall means that potential homebuyers are willing to pay more, driving home values higher. Another reason for higher housing demand is lower mortgage rates. Mortgage rates continued to trend lower in the fourth quarter, playing a critical role in supporting housing affordability. Mortgage rates for first-time homebuyers decreased from 3.02% in September to 2.90% in December 2020, the lowest interest rate for mortgages on record (Figure 5). Home prices, down payments, and interest rates all play a role in determining the monthly principal and interest payment, which is one measure of housing affordability relative to a borrower’s income. The First-Time Homebuyer Mortgage Payment Index (Figure 6) tracks the monthly principal and interest payment based on the average mortgage interest rate facing first-time homebuyers and FHFA’s Purchase-Only Home Price Index. It shows that the mortgage payment for first-time homebuyers increased by less than one percent during the quarter, but affordability conditions remained more favorable for first-time homebuyers compared to any time since early 2018. Two sub-indices track the impact of interest rate and home price movements on mortgage payment separately. These two sub-indices show separately the impact from changes in interest rates and home prices. Compared to Q3’20, lower interest rates reduced monthly mortgage payments by three percent, while higher home prices increased mortgage payments by three percent. Home prices have experienced faster growth in the fourth quarter – offsetting the impact of lower interest rates on the mortgage payment.
The rapid growth in housing demand and rising home prices are powerful incentives for homebuilders to ramp up production, which grew strongly in the fourth quarter. Strong growth in housing supply is one way for the market to absorb higher housing demand and reduce pressure on housing affordability. Single-family housing starts jumped another 18 percent during Q4’20 to a seasonally adjusted annual rate of 1.23 million units, the highest quarter since the fourth quarter of 2006. There is an important lesson here: single-family housing starts increased within one pandemic year the same amount as it did in the previous four years combined. It will be important to maintain that production as the economy emerges from the pandemic and refrain from returning to pre-pandemic levels.
As the U.S. economy emerges from the recession, one of the hurdles faced by potential first-time homebuyers is higher interest rates. For example, a mortgage rate of 3.4% (a 0.5 percentage point increase from December) would raise a monthly mortgage payment by around seven percent, and a mortgage rate of 3.9% (a one percentage point increase from December) would raise a monthly mortgage payment by around 14 percent. While the pandemic has increased the value many potential homebuyers place on homeownership, higher interest rates will likely tell us how much they are willing to pay.
Maintaining Access to Credit During the Housing Boom
The housing finance system continued to perform well during the fourth quarter to ensure access to credit for first-time homebuyers. The COVID-19 pandemic has stressed the housing finance system in three ways: more hurdles to buy and sell homes; tighter credit availability due to increased credit risk – both actual and perceived; and lack of mortgage industry capacity due to rising demand for refinancing. Credit availability for potential first-time homebuyers can be especially vulnerable since first-time homebuyers rely heavily on low-down payment mortgages for financing. The record number of first-time homebuyers suggests that the mortgage industry has been largely successful in maintaining access to credit. The mortgage industry has quickly and successfully shifted a large number of employees from the office to working from home by leveraging technology, which ensured that qualified borrowers can continue to access credit, while maintaining social distance protocols.
As a result, the real estate financing industry has been among a small number of industries that reported job growth since February. As of December, while overall payroll employment is down 6.5% from February, real estate finance sector employment is up 14 percent, and employment for mortgage and non-mortgage loan brokers is up 25 percent during the same period. For both segments, employment in December reached their highest levels since August 2007. By expanding its labor force, the mortgage industry was able to meet historical demand for mortgage credit for both home purchases and refinances. According to Inside Mortgage Finance, the industry originated a record $4 trillion of new loans.
Importantly, for the first-time homebuyer market, credit access to low down payment mortgages also continued. In the fourth quarter, 534,000 first-time homebuyers bought homes with a low down payment mortgage, accounting for 81 percent of the first-time homebuyer market (Figure 7). For the full year, 1.94 million first-time homebuyers bought homes with a low down payment mortgage, again accounting for 81 percent of the first-time homebuyer market. This represented a two-percentage point increase from 2019. Low down payment conventional mortgages backed by private mortgage insurance financed 265,000 first-time homebuyers in the quarter, up 53 percent from a year ago (Figure 8). Private mortgage insurance helped finance 40 percent of all purchases by first-time homebuyers in the quarter, more than any other low down payment mortgage product. For the full year, low down payment conventional mortgages backed by private mortgage insurance financed 899,000 first-time homebuyers, up 25 percent from 2019 (Figure 8a). FHA loans financed 192,000 first-time homebuyers during the fourth quarter, an increase of 19 percent from a year ago. For the full year, FHA loans financed 711,000 first-time homebuyers, up 13 percent from 2019.
The New Normal for First-Time Homebuyers
As the economy re-opens, there are still a lot of uncertainties around whether the pandemic-driven housing demand will persist and what “normal” will look like for first-time homebuyers. One of the key questions facing the market is the durability of the increased preference for homeownership. The pandemic has made homes more important to people’s working and social lives, which will likely persist. But we will likely find out in the next few years how big of a shift it will be. One important indicator will likely come in the next 3-6 months as offices re-open. We will find out how businesses and employers take their lessons from remote working and apply them. Those decisions will likely influence if homes will continue to, in part, serve as offices. Another important question is whether the economic re-opening will result in higher interest rates for homebuyers and put pressure on housing affordability. We may find out how tolerant potential first-time homebuyers will be toward spending significantly on their home purchases, especially as they will once again have the opportunity to spend on leisure, entertainment, and services in a post-pandemic economy. Finally, the housing industry accelerated the adoption of new technology during the pandemic. Homebuyers and sellers became more accustomed to buying and selling homes, applying for loans, and closing loans without in-person contact. Homebuilders increased production at four times the speed of the pre-pandemic period. Those lessons, technologies, and practices should continue, and make housing more accessible to potential first-time homebuyers.
About Tian Liu
Tian Liu has served as Chief Economist for Enact Mortgage Insurance since 2014. He is responsible for tracking and analysis of U.S. and regional economic conditions. He 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.
tian.liu@enactmi.com
919 807.9584
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 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.