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What Is Driving First-Time Buyer Mortgage Risk?

The housing market has plateaued at a high level and will become more bifurcated between first-time buyers and repeat buyers in 2019, according to the American Enterprise Institute (AEI).

The AEI, which published its findings on the housing market along with its monthly National Mortgage Risk Index (NMRI), expects the higher priced part of the housing market to see a moderation in home price growth, especially in the higher priced coastal markets.

“The current house price boom, now entering its seventh year, has been driven by two punch bowls, the Fed’s accommodative monetary policy, now being slowly withdrawn, and easy first-time buyer credit made available by federal agencies, which continues unabated” noted Edward Pinto, Co-Director of AEI’s Center on Housing Markets and Finance. “Continued credit easing for first-time buyers will offset the Fed’s tightening and fuel further unsustainable entry-level home price appreciation.”

AEI said that it expected a slowing transaction volume in some markets because of tax law changes and affordability pushing buyers into more affordable markets. However, due to continued credit easing by FHA and Fannie Mae, the lower-priced part of the market consisting predominantly of first-time buyers would "likely see continuing strong house price appreciation with transaction volume remaining around its current high level."

The NMRI found a huge spread of default rates across risk buckets as higher house prices concentrated at the lower end of the market, where leverage was seen to be increasing the most. Moving into 2019, the AEI projected even more risk as borrowers, especially, first-time buyers were forced to take on more leverage to buy a home.

“Given the continued credit easing for first-time buyers with much higher risk profiles, it is too soon to speak of a turnaround in house prices,” said Tobias Peter, Senior Research Analyst of AEI’s Center on Housing Markets and Finance. “Our past research proves that in a tight housing market as little as 30 percent of borrowers with high-risk levels can effectively drive up house prices for everyone in a census tract.”

The NMRI indicated that the First-time Buyer Mortgage Risk Index (FBMRI) for August was up 0.6 points from a year ago. When compared to August 2013, the FBMRI has increased by 3.1 points and at a new series, high FHA's FBMRI stood at 28.6 percent in August rising 2.1 points from a year earlier. Fannie Mae's FBMRI stood at 10 percent rising 0.8 points from a year earlier and four points since September 2012.

The data indicated that while repeat buyers had been able to avoid increasing leverage, the gap between first-time buyers and repeat buyers' risk had widened to 7.5 points from 4.6 points five years ago.

About Author: Radhika Ojha

Radhika Ojha is an independent writer and editor. A former Online Editor and currently a reporter for MReport, she is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Houston, Texas.
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