First-Time Homebuyers ‘Dominate’ Mortgage Market

Neither high prices, nor low supplies, nor tight credit and renting costs shall stay first-time home buyers from their ultimate goal, according to the Urban Institute.

The report (https://www.urban.org/urban-wire/first-time-homebuyers-will-continue-dominate-mortgage-market) says despite these obstacles, which make saving for a down payment difficult, first-timers have dominated the mortgage market for the past 10 years, and their share today is still high.

“We don’t see this changing anytime soon,” said author Karan Kaul. He attributed the dominance in part to a better economy, but noted a big chunk of the increase is driven by the pullback of repeat buyers.

Between 2001 and 2007, the paper said, repeat buyers accounted for 1.4 to 1.8 million home purchases a year, while first-timers were responsible for between 900,000 and 1.3 million. Today the two have traded places–in 2017 repeat buyers were responsible for just over 1 million home purchases while first-time buyers bought close to 1.5 million homes.

Kaul attributed the shift to falling house prices during the recession, which prevented millions of homeowners from accumulating equity in their homes–equity they have typically used to trade up to bigger homes.

“Although homeowners have more equity today, most of them also have ultra-low-rate mortgages they locked in during the recession, when rates were consistently below 4 percent,” the paper said. “Today, mortgage rates are closer to 4.6 percent. If a homeowner with a 3.5 percent rate were to trade up to a bigger home, it would come with a new mortgage at the prevailing, higher market rate.”

Thus, Kaul noted, homebuyers looking to use their home equity and take on no additional debt to fund a move to a bigger home would pay several hundred dollars extra every month because of the higher rate. On a $300,000 mortgage, they would be paying $200 extra every month, or $2,400 a year.

Because homebuyers typically take on additional debt when they upgrade, the paper said, the actual increase in the mortgage payment for anyone upgrading would be much bigger. Plus, the more rates rise in the coming years, the bigger the interest rate difference will become and the more money trade-up buyers will have to pay for interest alone.

“Many homebuyers will likely find it much more economical to simply stay in their existing homes,” Kaul said. “This will continue to dampen repeat buying volumes and continue the dominance of first-time homebuyers in the housing market. Since existing homeowners won’t release their starter homes into the market, and since we aren’t making up for that deficit through new construction, prices will likely keep going up for first-time homebuyers.”