The Pivotal Role of First-Time Homebuyers

First-time homebuyers have played a more significant role in the housing market turnaround than previously credited, said Genworth Financial, Richmond, Va.

In its First-Time Home Buyer Market Report (, Genworth said compared to repeat homebuyers, first-time homebuyers “play a more pivotal role in influencing housing inventory and home prices because they represent the shift of housing demand from rental to owner occupancy.”

The report said between 1994 and 2016, first-time homebuyers purchased on average 1.8 million single-family homes each year, accounting for over one in three of all single-family homes sold and 45 percent of the purchase mortgages originated.

“First-time homebuyers have led the housing recovery, contributing over 60 percent of the sales growth in the housing market over the past five years and 85 percent of the growth in the past two years,” the report said. “The resurgence of the first-time homebuyer market has contributed to very tight housing supplies and accelerating home prices, especially at the ‘low’ end of the housing market.”

The report noted during the Great Recession, single-family homes sold to first-time homebuyers saw a peak to trough decline of 900,000 units (43 percent), reaching a trough of just 1.2 million units in 2011. Over the past 10 years, the housing market has seen three million fewer first-time homebuyers in aggregate compared to the historical average.

“The first-time homebuyer market stagnated during the historic housing expansion of the 1990s and early 2000s, leading to a decline in first-time homebuyer mix,” the report said. “Instead, it was repeat homebuyers, including second-home buyers and investors, who led the surge in housing activity.”

Genworth said expansion of government lending programs and implementation of the first-time homebuyer tax credit provided temporary support to first-time homebuyers. “Between 2008 and 2010, first-time homebuyers represented 35 percent of all single-family home sales, which is close to its historical average,” the report said. “However, the percentage of single-family home sales to first-time homebuyers declined once the tax credit expired, and stayed below 30 percent for these three years.”

Other key report findings:

–First-time homebuyers have “always demonstrated a greater need” for low down payment mortgage products. Between 1994 and 2016, 73 percent of first-time homebuyers chose such products compared to 30-50 percent for repeat homebuyers. Mortgage products with a lower down payment will likely have a higher first-time homebuyer mix.

–Private mortgage insurance and FHA (government-backed mortgage insurance) are the two leading products for first-time homebuyers and have together accounted for close to one million first-time homebuyers a year since 1994. “They have played a key role in reviving the first-time homebuyer market in the current recovery, accounting for approximately 80 percent of its growth in the past two years,” the report said.

–First-time homebuyers purchased two million single-family homes in 2016, 15 percent more than 2015 and the most since 2006. During the first quarter, there were more first-time homebuyers than any other year since 2005, Genworth said, with 424,000 single-family homes were sold to first-time homebuyers, up 11 percent from a year ago and accounting for 38 percent of all single-family home sales.

“The 3 million missing first-time homebuyers accumulated over the past decade, as well as the Millennials reaching the household formation age will be two likely sources of further growth for the first-time homebuyer market over the next few years, which can push the first-time homebuyer market over 2 million units a year over the next few years,” Genworth said. “This should generate continued demand for growth in low down payment purchase mortgage lending, and in the demand for single-family homes priced below the median home price. We will likely see faster home price appreciation at the ‘lower’ end of the housing market. This will provide fresh growth opportunities to homebuilders at a time when the high-end market is showing less opportunity for growth.”

Genworth noted the first-time homebuyer market has “recovered” and private capital is pursuing growth in the market, but that the government lending program is still too big. Genworth said this means direct provision of liquidity through government lending programs, such as those sponsored by the FHA, should be a lower priority.

“Low down payment mortgages serve a real economic purpose for first-time homebuyers by reducing the down payment threshold to well below 20 percent,” the report said. “At the same time, they can be riskier than standard mortgages. As private sector products expand, the government should pay more attention to alternative products such as the piggyback loans of the last cycle, to make sure that lending remains well disciplined and that pricing is commensurate with risk.”