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First-Time Buyers Make Gains Amid Headwinds

graphs-and-moneyThe AEI Center for International Housing Risk [1] has declared that the rumors of the demise of the first-time buyer are “greatly exaggerated,” citing a 39 percent rise in origination volume to first-time buyers over the last year and a market share increase of 2.5 percentage points over the previous two years in August.

AEI’s data covers agency purchase loans, or mortgage loans that have a government guarantee. Approximately 93 percent of first-time buyer loans are agency loans, with the private market currently owning only about a 7 percent market share of first-time buyer loans, according to AEI.

While some reports have indicated that tight credit standards are preventing first-time buyers from entering the housing market at a faster rate, Pinto said rapid home price appreciation, particularly at the lower end of the market, has been one of the factors that has prevented would-be first-time buyers from making a purchase.

Continued short supply continues to put upward pressure on home prices. And AEI believes that policy moves such as increasing the GSEs’ conforming loan limits, which the Federal Housing Finance Agency did last week, may not help affordability.

“House prices will continue to rise as long as too much demand keeps chasing too little supply,” AEI Research Analyst Tobias Peter said. “Therefore proposals such as lower mortgage insurance premiums or higher loan limits will only stimulate more demand, worsening affordability—not improving it.”

Meanwhile, the rapid price appreciation has put repeat buyers at an advantage, because higher prices have resulted in more equity.

“Repeat buyers are in a better position because, by definition, they already own a home,” said Ed Pinto, Co-director and Chief Risk Officer of the AEI International Center on Housing Risk. “The house they’re buying also costs money, but they have more equity in the house they’re selling, and the first-time buyer doesn’t have that. First-time buyers are on the detrimental side because prices have gone up 6 percent in incomes have gone up just 2 percent, so they have to use more leverage.”

While more first-time buyer agency loans were made, the gap is widening between risk on first-time buyer loans and repeat buyer loans. In August, AEI reported the First-Time Buyer Risk Index  at 15.6 percent, which was largely unchanged from the previous year but 6.4 percentage points higher than the Repeat Buyer Risk Index. In August 2015, the gap between the two was 6.0 percentage points.

AEI’s First-Time Buyer Mortgage Share and Risk Indices cover nearly 5.1 million agency purchase loans from February 2013 through August 2016.