First-time buyer market booms in third quarter

The third quarter of 2020 saw the largest first-time homebuyer market in two decades, according to a new report from Genworth Mortgage Insurance.

The report, authored by Genworth chief economist Tian Liu, found that the first-time homebuyer market finished with a total of 700,000 single-family home purchases during the third quarter. That’s an increase of 15.7% from the previous year. Furthermore, taking seasonality into account, the number of first-time homebuyers was up 16.3% quarter over quarter to a seasonally adjusted annual rate of 2.55 million — the fastest pace ever recorded.

In the first nine months of the year, first-time buyers comprised 39% of single-family home sales and 58% of all purchase mortgages. Extrapolating further, it’s likely that 2020 will have one of the strongest first-time homebuyer markets ever, nearing the previous highs of 1999, when there were 2.38 million buyers over the course of the entire year, and 2000, when there were 2.26 million.

“The strength of the first-time homebuyer market was impressive whether measured in growth rate or in number, especially considering that the economy was still in the middle of a pandemic and a recession,” said Liu. “The first-time homebuyer market has quickly exceeded the pre-pandemic purchase level. … In this turbulent year, the first-time homebuyer market has performed beyond all expectations.”

The demographic foundation for the growth in first-timers is obvious: millennials, the largest homebuying cohort in history, continue to enter their peak homebuying window in droves at a time when interest rates have been historically low. Mortgage rates for first-time homebuyers fell from 3.36% in June to 3.01% in September — the lowest rate for first-timers on record, and a far cry from the recent peak of more than 5% set just two years ago.

Such low rates are offsetting the large escalations in price growth that first-time buyers are contending with as the year goes on, though not by much. Per Genworth’s data, lower interest rates decreased mortgage payments for first-time buyers by 4%, while higher home prices pushed payments upward by 3%.

But other factors are also fueling the growth, including the continued impacts of the Great Recession. As many as 3 million people held off on purchasing their first homes due to the downturn’s economic ramifications, adding them to the present buyer pool. And with restrictions affecting many travel and leisure plans during the current COVID-19 crisis, income that would have been allocated toward such costly expenditures have been freed up to be apportioned for housing.

Perhaps most pivotally, the housing finance system was also able to continue providing some access to credit for first-time homebuyers during the pandemic.

Credit availability, while improving, remains more than 30% below pre-pandemic levels, according to the Mortgage Bankers Association, and availability for first-time homebuyers tends to be vulnerable given their substantial reliance on low downpayment loans. But 577,000 first-time homebuyers, or 82% of the first-time market, received low down-payment purchase mortgages in the third quarter. Low-downpayment conventional mortgages financed 285,000 first-time buyers in the quarter, up 34% annually to reach a record high. FHA loans, meanwhile, were used by 195,000 first-time buyers in the third quarter, up 8% year over year.

“The record number of first-time homebuyers suggests that the mortgage industry has been largely successful in maintaining access to credit,” said Liu. “The mortgage industry has quickly and successfully shifted a large number of employees from the office to working from home by leveraging technology, which ensured that qualified borrowers can continue to access credit, while maintaining social distance protocols. As a result, the real estate financing industry has been among a small number of industries that reported job growth since February.”