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First-time Buyers Overpay on Housing

In general, first-time homebuyers overpay on their home purchases—particularly when compared to more experienced buyers, according to a paper released by the Federal Housing Finance Agency on Monday.

According to the FHFA’s Staff Working Paper 17-03, “Under What Circumstances do First-time Homebuyers Overpay? An Analysis Using Mortgage and Appraisal Data” by Jessica Shui and Shriya Murthy, first-time buyers technically pay less on their homes than repeat buyers, but this is because they purchase “less desirable houses.” When this is taken into account, Shui and Murthy reported, “first-time homebuyers actually pay significantly more than their more experienced counter parts.”

Put simply, first-time buyers typically pay more for the same house than a repeat buyer would—about $3,000 on average.

The paper continued, “Although FTHBs buy smaller, inferior, and cheaper homes, controlling for observed and unobserved house characteristics, they pay significantly more than repeat buyers . . .  Specifically, a typical first-time homebuyer pays on average 1.09 percent more than a repeat homebuyer does for the same house. Given that the average sales price in the main sample is $275,582, this translates to about $3,000 per transaction.”

Shui and Murthy proposed that this is likely due to a higher willingness to pay.

“First-time homebuyers are inexperienced house hunters and are more likely to be marginal borrowers,” Shui and Murthy stated. “In this paper, we present a robust result that first-time homebuyers are overpaying for their houses—possibly a result of their inexperience. Our analysis also suggests that certain appraisals and appraisers might be able to mitigate FTHB (first-time homebuyer) overpayment, though the underlying channel remains unclear.”

Though Shui and Murthy established that higher quality appraisers can help prevent overpayment, no correlation could be made between these situations and first-time homebuyers. Still, the notion of overpayment by first-time buyers presents an opportunity for policy change, the paper stated.

“The challenge for policy makers is to help them gain access to sufficient credit while controlling their default risk,” the paper stated. “However, first-time homebuyers may experience handicaps before credit even comes into the picture.”

About Author: Aly J. Yale

Aly J. Yale is a freelance writer and editor based in Fort Worth, Texas. She has worked for various newspapers, magazines, and publications across the nation, including The Dallas Morning News and Addison Magazine. She has also worked with both the Five Star Institute and REO Red Book, as well as various other mortgage industry clients on content strategy, blogging, marketing, and more.

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