You can’t have home sales without buyers, and the most important buyers of all are first timers. While it might seem that a sale is a sale, that’s not the case. The chain of transactions that powers the housing sector begins with first-time buyers. Unfortunately, first-timers are a vanishing species and as a result, millions of transactions are missing from the real estate marketplace.
Why has ownership become less interesting to potential first-time purchasers and what can be done about it? Could first-time buyers become the solution for millions of owners now trapped in underwater properties?
The First-Timer Paradox
First-time buyers are important because they represent additional demand.
“First-time homebuyers help determine the health of the overall housing market,” explains Rob Chrane, CEO at Down Payment Resource. “New buyers often purchase the entry level housing stock, allowing repeat buyers to move up to a new home.”
According to Robert Dietz, chief economist with the National Association of Home Builders (NAHB), “First-time buyers have a strong long-run impact because they lift the homeownership rate, which up until the first quarter of 2019 had posted two-plus years of gains. Additionally, economic research shows that housing wealth is a major component of the savings and wealth of typical American households. Delaying homeownership thus will have long-run, negative impacts on the wealth of typical families. For example, Federal Reserve data show that homeowners, on average, have 40 times the wealth of renters.”
As it turns out, first-timers generate a lot of demand and the owners who benefit most are at the base of the market.
“Owners of the country’s most affordable homes are gaining equity the fastest, because demand for entry-level homes continues to grow faster than supply,” reported Zillow in a 2018 study.
Over the past five years, it added, “People who own the most affordable homes have seen their equity grow by 44.4 percent, while owners of top-tier homes have gained 26.6 percent.”
“In today’s mortgage market,” Mike Fratantoni, chief economist with the Mortgage Bankers Association (MBA) told the Housing News Report, “loans to buy a home comprise about 75% of the total, much higher than in recent years when we were in a refi boom. In a purchase-dominated market, first-time buyers become even more important.”
But as good as first-timers are for the housing sector, a lot of potential sales are never made.
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