Trump Effect: First-Time Homebuyers Purchase Most Homes Since 2006

• impact of tax reform expected to be a net positive
• supply constraints continue to hinder growth and drive up home prices

“The first-time homebuyer segment had one of its strongest years on record, and we expect it to continue growing in market share and driving the purchase market in 2018, ” said Genworth Mortgage Insurance Chief Economist Tian Liu.

First-time homebuyers purchased 2,070,000 new or existing homes, a seven percent increase from 2016 and the strongest year for the first-time homebuyer market since 2006. And first-time homebuyers accounted for 39 percent of single-family homes sold and 55 percent of purchase mortgages financed.

The trend is slowing due to supply issues.

“Most homes built today are significantly outside of the typical first-time homebuyer’s price range ($250,000 and below),” Liu said. “This supply shortage at the lower end of the price curve is driving home prices higher, which is sidelining many first-time homebuyers.”

“We expect the growth of new single-family homes to continue lagging demand,” he added.

The Genworth economist credits President Trump’s tax reform as a driver for the resurgence in first time home buying.

“Regarding tax reform, we view the new laws as a net-positive for first-time homebuyers, but caution that this also varies by region,” Liu said. “States with higher taxes will likely feel a lesser benefit than states where the cost of living is lower.”

Q4’17 Overview

• 505,000 single-family homes were purchased—the best fourth quarter for first-time homebuyers since 2006—compared to 485,000 during Q4’16
• First-time homebuyers accounted for 39 percent of single-family homes sold and 55 percent of purchase mortgages financed
• 398,000 home sales to first-time homebuyers were financed by low down payment mortgages, the strongest fourth quarter for these mortgage products since 2000
• 157,000 loans to first-time homebuyers were insured by private mortgage insurance, a 22 percent increase from a year ago, and the best fourth quarter for private mortgage insurance products on record

FY’17 Overview

• First-time homebuyers purchased 2,070,000 new or existing homes, a seven percent increase from 2016 and the strongest year for the first-time homebuyer market since 2006
• However, purchase growth has declined since 2014, with 18 percent growth in 2015, and 12 percent growth in 2016, compared to only six percent growth in 2017
• The construction of new homes priced under $250,000, a key price segment for first-time homebuyers, declined by two percent, showing that supply of new affordable homes still lags demand. This supply constraint is elevating home prices and keeping many first-time homebuyers on the sidelines
• Further to that point, sales of homes priced above $500,000 grew by 25 percent in 2017 (+21,000 units), compared to a two-percent reduction in home sales below $250,000 (-1,000 units)
• All-cash home sales decreased by seven percent year over year
• Purchase mortgage loans increased by five percent compared to a two-percent growth rate of single-family home sales, driven by first-time homebuyer demand and fewer cash sales

2018 Macro-Economic Predictions

• Improving economic conditions such as rising income and more job openings should drive even stronger housing demand from first-time homebuyers
• Strong first-time homebuyer demand coupled with lagging increases in supply is expected to result in home prices continuing to rise at their current pace; this view is contrary to many industry forecasts
• For homebuyers, rising home prices will likely result in both higher debt loads and larger monthly mortgage payments
• For homeowners, the lack of “move-up homes” on the market will likely push more spending towards remodeling and repair projects, leading many to remain in their homes for longer durations
• Tax reform is expected to have a net-positive effect for the average family (median income, median-price home, two kids), because while the new tax law will remove some of the benefits previously dedicated to homeownership (lower mortgage interest deduction limit, cap for sales and state/local income and property taxes), the corresponding income benefits (lower individual tax rates, higher limits on standard deductions, and increased child-tax credit) will outweigh the deductions for most markets. The exception will be markets with high home prices, high income, and high state and local taxes.