Is Now a Good Time for First Time Home Buyers?

There is no clear-cut answer when determining if the current U.S. housing market is in the right condition for first-time home buyers. As is always the case in the nuanced world of real estate, it seems that it is both a good and bad time for first-time home buyers to enter the market. While there are many obstacles they still face, there are also new regulations that are leading first-time buyers to give up those rent checks in place of mortgage payments.

Data has shown that as 2015 came to a close, first time home buyers—who have been largely removed from the housing market for quite some time—slowly began to come back. Now the question remains, what's ahead for 2016?

The Rise of First Time Home Buyers in December

According to data from the National Association of Realtors, the percentage of first-time home buyers in December 2015 was the highest it had been since August 2015.¹ Thirty two percent of all home buyers in December 2015 were first timers, a 2 percent rise from the previous month. It was also a 3 percent rise from December 2014. 

Why the Growth? 

According to Bloomberg, the growth probably has a lot to do with the Obama Administration's January 2015 decision to lower the mortgage insurance premiums on loans provided by the Federal Housing Administration.² The U.S. Department of Housing and Urban Development reported in November that this change gave 75,000 new borrowers with credit scores of 680 or below access to a home loan.³

Bloomberg said that right now, the fastest-growing sector of the mortgage market is low down payment loans from the FHA. Using data from Ellie Mae Inc., the publication explained that 22 percent of all loan originations were insured by the FHA. At the same time in 2014, only 17 percent of loan originations were from the FHA. Because FHA-backed loans are most commonly used by first-time home buyers, these metrics are significant to demonstrate an increase in first-time home buyer interest in the housing market. 

MarketWatch spoke with Realtor.com's Chief Economist Jonathan Smoke, who agreed that first-time buyers—particularly millennials—seem to be making a comeback.⁴ He said research conducted by Realtor.com and OptimalBlue found that 35 percent of all mortgages in 2015 were purchased by those between the ages of 25 and 34. Like Bloomberg, Smoke attributes the rising interest to the lowered insurance premiums on FHA loans. Smoke also said the changing Fannie Mae and Freddie Mac regulations have also played a role in rising interest, as the two lenders can now buy loans with down payments as low as 3 percent. 

"Last year's decision to lower premiums was designed to open the door to those previously priced out of homeownership," U.S. Department of Housing and Urban Development Secretary Julian Castro told Bloomberg. "We've seen positive results with new buyers entering the market and making the American dream of homeownership a reality." 

Challenges First Time Home Buyers Still Face 

While many experts have a positive outlook for the reentrance of first-time home buyers into the U.S. housing market, others are not so optimistic. Issi Romem, chief economist at BuildZoom, recently released an analysis stating that the income needed for first-time buyers to purchase a home is rising.⁵

Romem believes that despite the country's recent economic growth and more relaxed lending standards, homes are not actually becoming more affordable. Home prices are rising, which means the amount people need to save up for down payments is rising too. In addition, rent is still becoming more expensive, growing at a faster rate than income. So not only are down payments rising, but high rent prices are making it extremely difficult for potential buyers to actually save money for one. As a result, Romem said, the average income needed to afford a home is growing.

Another limitation for first-time buyers is the increase in homes being built for wealthier buyers. The Wall Street Journal said in 2015 the size of new homes grew.⁶ Using data from the National Association of Home Builders, WSJ explained that in 2014 the average size of a new home was 2,660 square feet, and by 2015 it had jumped to 2,720 square feet. While this sounds like it may be a sign of a healthy market, it is not the best news for first time buyers who can't afford large homes.

Builders have not been able to spend much time building starter homes, limited by construction costs, the difficulty for non-wealthy buyers to get a mortgage and land prices. So as the average size in homes grow, the more difficult it becomes for first-time buyers to enter the market. 

A Look Toward 2016

"Strong job growth in recent years and young renters' overwhelming interest to own a home should lead to a modest uptick in first-time buyer activity in 2016," Lawrence Yun, chief economist for the National Association of Realtors, told MarketWatch. While there is still a lot holding them back, the housing market will hopefully see at least some modest growth in the number of first-time home buyers. 

First-time home buyers are very important to the housing market. According to the Urban Institute, they are the "lifeblood of our current housing system."⁷ Without them current owners cannot move into larger homes or retirement communities. The market needs them to fully function, which is why their behavior is so important.

Sources

¹ National Association of Realtors 
² Bloomberg
³ U.S Department of Housing and Urban Development 
⁴ MarketWatch 
⁵ BuildZoom
⁶ Wall Street Journal 
⁷ Urban Institute