Freddie Mac: 'First-Time Homebuyers are Driving the Market Forward'

There were many factors behind the substantial increase in homebuying since the beginning of the pandemic, including record-low mortgage rates, shifting homebuyer preferences towards larger living spaces, increased remote work opportunities, migration to more affordable exurban suburbs or cities, and greater investor activity in the single-family market.

However, one overlooked factor dwarfs them all - rise in first-time homebuyer purchases. First-time homebuyers are the major driver of the increase in demand. In 2021, Freddie Mac financed 554,000 loans for first-time homebuyers - up 22% from 2020 and the highest level since tracking of this data began. While the rise in mortgage rates has caused affordability to deteriorate in the last few months, first-time homebuyer activity as of March has held up more than repeat buyers in this uprate cycle.

One of the main drivers for the booming first-time homebuyer activity includes the demographic of Millenials that are now in their early-to-mid-30s - the typical age range of first-time homebuyers. Alongside the surge of Millenial homebuyer activity, there is also a second category of potential buyer that has nearly doubled over the past ten years, and that is the high-income young renter. These are just some of the factors that have caused a large reservoir of untapped potential first-time homebuyer demand.

Year-to-date mortgage rates have increased two percentage points, the most since 1980, but Freddie Mac’s first-time homebuyer share is only down -1 percent from a year ago for Q1 2022 versus a -8 percent decline for repeat homebuyers. While the increase in mortgage rates has had an impact on overall purchase activity, it’s been less impactful on first-time homebuyers. Clearly, first-time buyers have not only been behind the rise in purchase activity prior to this year, but so far first-time homebuyers are serving as a purchase market buffer against the rising tide of mortgage rates. 

Another driver of the recent surge in first-time homebuyers was delayed homebuying activity by prime-age households. Homeownership rates among 25- to 44-year-olds with incomes of $75,000 or more were between the low and mid-80s for three decades, before declining to the low 70s after the Great Recession. With incomes above the median, these households should have been able to afford homes in most cities. Yet their homeownership rate fell nine percentage points relative to the last 35 years and still has a long way to go to recover.

This decline in homeownership rates is due to a variety of factors beyond the long-lasting impacts of the Great Recession and the wave of foreclosures on homeowners who purchased in the early 2000s. Notable factors include longer-term income stagnation, increased automobile and student loan debt, delayed marriage, and declining birth rates. The combination of these factors made it more difficult for renters to save for a down payment, delaying their transition into homeownership. 

Obstacles for First-Time Homebuyers

While first-time homebuyer demand is driving the market forward, the lack of supply of affordable entry-level home remains a significant obstable, and while the supply of larger and higher-price new homes has improved, this has not led forward into addordable entry-level homes.

Additionally, the lack of supply of new affordable entry-level homes is impacting first-time homebuyers’ preference between new and existing homes. Since emerging from the Great Recession, of the first-time homebuyers Freddie Mac helped to purchase a home, only 11% purchased new homes and prior to the Great Recession, 21% of such homebuyers purchased new homes. These percentages are well below the levels in the 1990s and mid-2000s before the Great Recession. 

“First-Time Homebuyers Are Driving the Market Forward.” Freddiemac.com, 2022, www.freddiemac.com/perspectives/sam-khater/first-time-homebuyers-are-driving-market-forward.

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