Given the vital role the housing market plays in the U.S. economy, you can look to any number of indicators on a weekly, monthly or annual basis to better understand the current state of the market. Beyond housing starts and home prices, though, first-time homebuyers have emerged as an important bellwether through the cycle.
This group of people is achieving part of the American Dream: Owning a home. In doing so, these buyers take a unit from the market but don’t give one back, like repeat buyers do. First-time homebuyer purchases are pure growth—and growing is just what this segment has done for the past five years. While the first few months of 2020 defy historical trends, here are five takeaways from first-time buyer market behavior in 2019, drawn from data used in Genworth’s Q4’19 First-Time Homebuyer Market Report, to consider as our industry plans for an uncertain future.
1. The first-time homebuyer market finished 2019 stronger than ever.
In the fourth quarter of 2019, first-time homebuyers purchased 517,000 single-family homes, a 6% increase from the third quarter of 2018. To put it into perspective, 38% of all buyers and 56% of purchase borrowers were first-time buyers, making them the most important customer segment for the housing industry at the end of 2019.
While the first half of 2019 was slower, a stronger second half pushed the first-time homebuyer market to a strong full year result of 2.09 million. With the market exceeding 2 million first-time homebuyers each year for the past three years, it represents a long overdue rebound from the trough earlier in the decade. Historically, the number of first-time homebuyers has averaged 1.8 million a year, or more than 18 million over a decade, meaning it’s entirely possible that the decade of the 2020s could see more than 18 million first-time buyers.
2. First-time homebuyer demographics continued to mature throughout 2019.
As we look to the future, you may begin to see a shift in growth from first-time to second-time homebuyers as the Millennial population continues to age, suggesting a turnaround in homeowner mobility. In terms of the economy, a recovery in homeowner mobility is important because it implies a significant increase in opportunities.
Think of it this way, 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. The strong recovery in the first-time homebuyer market throughout 2019 increased the pool of potential second-time homebuyers, creating a prolonged housing cycle as well as a change in growth opportunities for the housing industry.
3. Strong job growth and affordable homes remain important factors for first-time homebuyers.
In 2019, first-time homebuyers were building their careers smack dab in the middle of a strong job market.
Present-day 2020 is completely different, and we won’t see the effects of that until later in the year. It’s no surprise that first-time buyers have been moving to areas with strong job growth; however, strong job markets tend to significantly increase home prices, which can hamper housing affordability.
As a result, you often see many first-time homebuyers living in areas with strong job growth and medium housing affordability.
When looking at job growth on a state-by-state level, states with fast job growth reported first-time homebuyer growth rates of 44% between 2014 and 2019, compared to the 37% growth rate for states with slow job growth. 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, tend to have lower housing affordability. Arkansas is the only state that has both high job growth and high affordability. In 2019, the best options for first-time homebuyers were states with fast job growth and medium housing affordability, including Georgia, North Carolina, South Carolina, Tennessee and Texas.
4. Low-down payment mortgage options are essential to get first-time homebuyers in homes.
A 20% down payment is beyond what most first-time buyers can save before their peak household formation age of early to mid-30s. On average, it would take the typical borrower at least seven years to save for a 20% down payment, which is understandably discouraging. Historically, a large majority, about 80%, of first-time homebuyers have used some form of low-down payment mortgages, whether that’s conventional, FHA, VA or USDA loans. Up 1% from 2018, 1.66 million first-time buyers used some form of low-down payment mortgage in 2019. 2019 also 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% of the purchase price in 2019.
Growth in the low-down payment mortgage market is driven by conventional loans backed by private mortgage insurance, especially loans with a 3% down payment. Among 3% down payment conventional purchase loans, over 90% 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 buyers for the second consecutive year. Translated, the private mortgage insurance industry enabled lenders to finance 720,000 first-time homebuyers in 2019. At the end of 2019, over $1.2 trillion of single-family mortgages had insurance coverage from the private mortgage insurance industry, representing almost 11% of the total mortgage debt outstanding.
5. Improving housing affordability provides a better environment for first-time homebuyers.
More than any other factors, lower interest rates and slower growth in home prices helped improve housing affordability in 2019. In addition to lower mortgage rates, housing affordability also improved as homebuilders expanded building activity by 16% in the $200,000 to $400,000 price range, leading to the fastest growth in new homes sold since 2016. The increased supply could shift home sales to new construction and reduce the inventory pressure in the previously owned market and pressure on home prices. Lower rates mean significant savings for first-time homebuyers, but the number of homes in that critical $200,000 to $300,000 range lagged the demand in 2019. A sufficient inventory of homes in the $200,000 to $300,000 price range provides more opportunities for first-time buyers to enter the housing market without waiting for existing homebuyers to move on or up to their next home.
What now?
During the past five years, the tremendous growth in the first-time homebuyer market showed that first-time homebuyers were busy building careers and flocking to areas with abundant job opportunities attractive to prospective first-time homebuyers. 2019 was a banner year for first-time homebuyers, but the lasting effects that COVID-19 will have on that segment of the market are yet to be seen.
While current market conditions are unprecedented, we can look back at history to see how this segment of the market has fared during times of crisis—and the most similar model we can reference is the 2001 recession triggered by 9/11. During that time, the number of first-time homebuyers fell by 14% to 1.95 million and the decline lasted for one year. In 2002, the number of first-time buyers recovered to more than 2 million. Regardless of how the housing market is affected by the COVID-19 crisis, first-time-homebuyers will remain an important force to watch through the recovery and beyond.
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