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Mortgage Tailwinds and Headwinds

Editor's note: This story originally appeared in the January edition of MReport.

The COVID-19 pandemic is a historically unique event for all sectors. There’s no playbook, and it’s clear that only some of our experience through the housing crisis will help us to navigate today’s challenges. We’ve had to get comfortable with the wait-and-see strategy, ready to pivot on the latest regulatory guidance, jobs report, or stay-at-home order. As we head into 2021, there’s one segment of the housing market that remains an important bellwether even in these uncertain times: the first-time homebuyer market.

First-time homebuyers are important because they take a housing unit from the market, but don’t give one back, creating pure growth in homeownership. Over the past five years, the first-time homebuyer segment has grown tremendously. However, they have not been immune to the impact of the COVID-19 pandemic. To best support the health of this important segment of the housing market in the New Year, it’s helpful to have an idea of what first-time homebuyers have going for—and against—them.

2020’s First-Time Homebuyers
Even though 2020 has been an unprecedented year, looking at years past can help us see how this segment of the market fares during times of crisis.

For example, during the 2001 recession triggered by 9/11, the number of first-time homebuyers fell by 14% to 1.95 million and the decline lasted for one year. In 2002, the first-time homebuyer market recovered to more than two million. The financial crisis of 2008 resulted in over 3 million first-time homebuyers being absent from the housing market through 2015. Today, first-time homebuyers make up a significant segment of homebuyers, accounting for more than half of all purchase mortgage borrowers at over 2 million for the past three consecutive years. Due to the size of this
group, mortgage professionals across the housing industry can all agree that this is a segment of the market that simply cannot be ignored. They’ve proven resilient, so first-time homebuyers will continue to remain an important force to watch throughout the recovery in 2021 and beyond.

Despite enormous challenges, the housing finance system has been able to maintain credit availability for first-time homebuyers throughout the pandemic.

Our Chief Economist Tian Liu reported in his recent First-Time Homebuyer Market Report that the percentage of home sales to first-time homebuyers did not decrease from pre-COVID-19 levels, and the percentage of firsttime homebuyers using low-down payment mortgages increased to 83%, which is higher than the historical average. A few main reasons have allowed the housing finance system to largely maintain credit availability throughout 2020: continued investment in technology to increase capacity elasticity within the industry, laser-focus on prudent underwriting, and adequate capital availability in the mortgage finance system.

As we look to 2021, mortgage professionals and industry participants are wondering if there will be any permanent changes in location and desired home type as a result of the COVID-19 pandemic. Currently, the evidence is varied. The rapid rebound in the housing market, especially in areas hit
hard earlier in the year suggests limited changes to homebuyer behavior. This is why working together as an industry to continue to support first-time homebuyers entering the market will remain a critical task in maintaining and supporting growth in this segment.

2021 Tailwinds
A few pandemic-related events may give first-time homebuyers some air, one of which is the approval of one or more COVID19 vaccines that will likely speed up the re-opening of the U.S. economy. Younger workers in their peak first-time homebuying ages have fared worse during the recession as businesses tightened hiring of inexperienced workers that typically require training.

As of September, 8.7% of workers between the ages of 25 and 34 are unemployed, compared to unemployment rates of under 7% for workers over the age of 34. A COVID-19 vaccine could also help many potential first-time homebuyers get their careers back on track, which would not only be a win for 2021, but for years to come. Additionally, the COVID-19 pandemic has disrupted commercial real estate in a number of industries significantly—retail,
entertainment, and tourism, to name a few. Because of this, investors have started to move away from those segments and are looking upon the housing sector a bit more favorably. That’s important because more capital in the housing sector will likely lead to an increase in housing supply, which has been slimmer throughout 2020 than previous years. Additionally, there could be a push for land to be repurposed from commercial
real estate to residential housing to meet that demand. Lastly, we can expect that, while many employees will likely move back to working from offices
and resume some sense of normalcy as it relates to the professional work environment, employers may also be more apt to adjust their own policies to accommodate flexible work locations since working from home or remotely has gained much greater acceptance over the past year. This less frequent (or complete absence of) commute could put a significant portion of the workforce in a more realistic position to consider purchasing a more affordable home further away from urban centers.

2021 Headwinds
When it comes to headwinds that are making growth a bit harder for the first-time homebuyer market, affordability tops the list. The historically low mortgage rates we saw in 2020 have been a significant boost to affordability for first-time homebuyers. According to data from our Chief Economist Tian Liu’s 2Q20 First-Time Homebuyer Market Report, however, those low interest rates have not been able to offset higher home prices that resulted when that strong first-time homebuyer demand meets inadequate increases in housing supply.

In fact, between January 2013 and now, the monthly principal and interest cost for first-time homebuyers has increased by 55%, almost entirely due to higher home prices. In 2021, as the economy is expected to start to recover, interest rates may slowly increase as a vaccine or multiple vaccines move closer to distribution and economic recovery gains momentum, thereby potentially increasing pressure on affordability for all homebuyers, but especially younger homebuyers who typically have to borrow more of the purchase price.

Additionally, the economic recovery has been uneven so far, hurting employees in industries like service, tourism, travel, entertainment, and energy, more than other sectors. These sectors are typically where you'll find a large portion of the first-time homebuyer segment. While there will likely be some improvement in these sectors over time, it is highly likely those employees will face greater employment challenges, encouraging career transitions to different employers and industries, and likely delaying their homeownership.

As we’ve seen it, 2019 was a banner year for first-time homebuyers, 2020 was a year of disruption and correction, and 2021 remains to be seen.

Whatever the new year brings, the housing finance industry would be well served to understand how best to support and enable this very important segment.