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AEI: First-time homebuyers are still in the game

Loan data from the Washington, D.C.-think tank the American Enterprise Institute (AEI) suggests that first-time buyers — which include most younger millennial buyers — have been purchasing homes at roughly the same level as last year and contrary to recent studies by the National Association of Realtors (NAR).

firstbuyerThe first-time homebuyer share of home purchases — here defined as buyers who haven’t owned a home within three years — was at 56 percent as of April, which was virtually unchanged from the same month a year ago, AEI data suggests. NAR recently pointed to a declining number of home sales in the lower price tiers as evidence that first-time homebuyers have been squeezed out the marketplace by higher home prices.

“Effectively, it has been going up, and now it has plateaued,” said Ed Pinto, co-director of the AEI Center on Housing Markets and Finance. “We think it has plateaued because it has gotten so high, but the point is, it is not going down.”

NAR estimated that first-time homebuyers accounted for 31 percent of buyers in May, down from 33 percent in April and a year earlier. That share of first-time ran about six percentage points below the 40 percent share considered normal.

AEI’s figure is based on government mortgage data dating to 2012, whereas NAR’s figure comes from a monthly survey of Realtors.

AEI tends to take contrarian positions on mortgage-credit conditions and favors dialing back the government’s role in the industry. AEI has, for several years, for example, said that mortgage-credit conditions are overly loose, and the credit easing has hurt lower-income borrowers by artificially inflating the values of lower-priced homes. Other policy analysts say the current conditions on borrowers and lenders remain quite tight by historic standards, and the standards should be loosened further to give more people on the margins access to the market.

Pinto said that AEI doesn’t dispute figures from NAR that suggests that the total number of home sales have declined in the lower-price tiers. He said lower sales within these fixed-price points do not imply lesser activity from first-time homebuyers. In May, home sales declined by 18 percent for homes priced under $100,000 and declined by 5.6 percent for homes priced between $100,000 and $250,000, NAR reported.

Pinto said this only suggests that home prices have increased dramatically in these fixed-price categories, thus limiting the supply of these homes and the numbers that would naturally be sold. He said a better way to gauge buyer activity is to separate the market into four elastic price-tier categories, representing low-priced homes, medium-low priced homes, medium-high priced homes and high-priced homes.  

AEI has been tracking homebuyer activity in these four buckets in 74 major metropolitan areas and 500 counties. That data suggests that buyer activity has been just as strong in the two lowest price tiers, but buyers in the lower tiers are borrowing more to keep up with the price growth in these categories. 

The Federal Housing Administration and the government-sponsored enterprises Fannie Mae and Freddie Mac have loosened their standards on loan-to-value and debt-to-income, enabling buyers to put virtually nothing down on a home and commit up to 50 percent of their income to servicing their debt loads. He said these changes have mostly increased access to leverage for buyers of entry-level homes. Those moves have had the effect of driving up the prices of a limited supply of lower-end homes, Pinto said. He pointed to AEI's own analysis of its four price buckets and a battery of other studies that suggest that prices of lower-end homes have risen at a much faster rate than in the upper tiers.

“The more leverage you apply in a price bin during a sellers’ market, the higher the prices go up,” Pinto said. “The numbers [of first-time homebuyers] are not declining, and the prices [of lower-priced homes] are going up very rapidly, particularly where the leverage is being applied the highest.” 


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