Investor Alert

Dec. 4, 2021, 3:24 p.m. EST

Despite low mortgage rates, America’s housing market keeps many first-time buyers on the sidelines

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By Jacob Passy

There’s been a rebound in home-buying demand in recent weeks, as evidenced by mortgage application data. But first-time buyers aren’t behind the surge.

The latest data from the Mortgage Bankers Association, for the week ending Nov. 26, showed that overall mortgage applications dropped 7.2% on a weekly basis. But loan applications for mortgages meant to purchase homes increased by 5.1% week-over-week, building on the previous week’s 4.7% uptick.

Overall, in November, mortgage applications for loans intended for purchasing homes increased by 7% in November, according to an analysis from Joshua Shapiro, chief U.S. economist at MFR Inc. That’s compared with a 1% decline in October and an 8% gain in September. But when diving deeper into the data, it’s clear that not all buyers are flocking back to the market in similar numbers.

“As home-price appreciation continues at a double-digit pace, buyers of newer, pricier homes continue to dominate purchase activity, while the share of first-time buyer activity remains depressed,” Joel Kan, associate vice president of economic and industry forecasting for the Mortgage Bankers Association, said in the trade group’s latest report.

Evidence for this can be seen in a number of data points, including the share of applications for mortgages backed by the Federal Housing Administration. FHA loans can be a useful proxy for first-time buyer demand, since they require smaller down payments and lower minimum credit scores than loans backed by Fannie Mae /zigman2/quotes/208846331/composite FNMA -0.23% and Freddie Mac /zigman2/quotes/202741363/composite FMCC -1.28% .

In the most recent week, FHA loans made up only 9.4% of overall purchase loan applications, down from 10.2% during the same week in 2020.

The number of first-time buyers increased last year

Over the past year, the share of buyers who were purchasing their first home actually increased, according to recent data from the National Association of Realtors, rising from 31% to 34%. Despite the increase, the figure remained well below the historical norm of 40%.

And those first-time buyers that managed to achieve that milestone did so in spite of many obstacles. “This year has dealt several headwinds for many of them,” said George Ratiu, manager of economic research at Realtor.com.

“The early part of 2021 saw an overheated market, in which pandemic-accelerated demand for homes ran headlong into a market starved for inventory, due to over a decade of underbuilding,” he added. As of the mid-point of 2021, there was a shortage of around 5.2 million homes, based on analysis from Realtor.com.

“Even with low mortgage rates, many first-time buyers found it difficult to compete with repeat buyers bringing equity from a prior home, or other buyers leveraging all-cash offers,” Ratiu said.

So far this fall, the housing market has cooled from the crazed pace earlier in 2021, while maintaining a higher rate of home sales than is typical for this time of year. But inflation has put a dent in would-be buyers’ wallets — particularly when it comes to the rising cost of rent. According to the National Association of Realtors, 73% of first-time buyers over the past year were previously renters.

Plus, mortgage rates have risen above the ultra-low levels seen at the beginning of 2021, and most economists expect they will rise as the Federal Reserve eases off its pandemic-related stimulus.

“Millennials are in the market, but more of the success in actually buying a home is coming from those with larger budgets – they can beat out bids and have more inventory to choose, especially for new homes,” said Adam DeSanctis, director of public affairs at the Mortgage Bankers Association.

First-time buyers’ success might depend on whether the inventory situation improves. Ratiu said that more homeowners are expected to list their homes for sale in the coming months, which would give buyers more options and put a damper on the high rate of home-price growth. If that expectation doesn’t come to fruition, success could end up being a reflection of which buyers have access to financial assistance.

According to the National Association of Realtors, between 2020 and 2021 more than 1 in 4 first-time buyers used a gift or loan from friends or family for their down payment.

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