April’s results continue to show that first-time buyer volume and share remain strong, showing little variance beyond seasonal trends. However, the first-time buyer Mortgage Risk Index hit a series high of 15.28 percent in April, moving deeper into the high risk loan category. This growing leverage puts the housing market at risk given interest rates are at historically low levels and American households are facing increasingly sharp swings in income and expenses.
- First-time buyers accounted for 57.9 percent of primary owner-occupied home purchase mortgages with a government guarantee, up from 56.8 percent and 57.4 percent respectively in April 2014 and 2013
- The Combined FBMSI (which measures the share of first-time buyers for both government-guaranteed and private-sector mortgages) stood at an estimated 52.2 percent, up from 51.2 percent and 51.8 percent respectively in April 2014 and 2013
- The number of primary owner-occupied purchase mortgages going to first-time buyers over the 6-month period of November 2014-April 2015 totaled an estimated 577,000, up 8½ percent from the 532,000 mortgages over the same 6-month period in 2013-2014
- The Agency FBMRI stood at a series record of 15.28 percent, up 0.2 percentage point from the average over the prior three months and up 0.9 percentage point from a year earlier. The Agency FBMRI is nearly 6½ percentage points higher than the mortgage risk index for repeat homebuyers
The First-Time Buyer Mortgage Share and Mortgage Risk Indexes (FBMSI and FBMRI) are key housing market indicators based on monthly data for nearly all government-guaranteed home purchase loans, which greatly reduces the risk of sample error. By relying on millions of loans, this approach stands in contrast to traditional first-time buyer surveys based on small samples of homebuyers or real estate agents.
In April 2015, first-time buyers accounted for 57.9 percent of primary owner-occupied home purchase mortgages with a government guarantee, according to the Agency First-Time Buyer Mortgage Share Index (FBMSI). As shown in the chart below, the April share was roughly 1 percentage point above both the revised share of 57.0 percent for March and the April 2014 share of 56.8 percent. Although the first-time buyer share last month reached the highest level in its 25-month history, the series has displayed no clear trend apart from seasonal variation. Additional data will be needed to determine if the April increase represents the beginning of a sustained rise in the share.
The chart below displays the monthly first-time homebuyer percentage by agency. As shown, the share varies widely across agencies. FHA is at the high end with a share at or above 80 percent, while Freddie Mac is at the low end with a share of about 40 percent. Fannie Mae’s share has consistently tracked somewhat above Freddie’s and stood at 47 percent in April. Fannie’s share is higher mainly because of its much greater volume of 97 percent LTV loans for first-time buyers relative to Freddie. These loans carry substantial risk and account for roughly half of the gap between Fannie’s MRI for first-time buyers (8.30 percent in April) and Freddie’s (6.61 percent).
The Combined FBMSI (which measures the share of first-time buyers for both government-guaranteed and private-sector mortgages) stood at an estimated 52.2 percent in April 2015. Consistent with the agency series, the broader combined share has varied seasonally but has displayed no trend over its 25-month history (see chart below).
The monthly count of agency first-time buyer mortgages (the Agency FTB Loan Count) is presented in the chart below. The number of primary owner-occupied purchase mortgages going to first-time buyers over the 6-month period of November 2014-April 2015 totaled an estimated 577,000, up 8½ percent from the 532,000 mortgages over the same 6-month period in 2013-2014. This increase in the Agency FTB Loan Count outpaced the 6¾ percent rise in total agency purchase loan volume over the same period.
The Agency FBMSI is calculated, as noted above, from a nearly complete dataset of government-guaranteed home purchase loans, which greatly reduces the risk of sample error. The near-universe of included loans stands in contrast to the 2014 survey of homebuyers and sellers conducted by the National Association of Realtors (NAR), which was based on responses constituting only 0.2 percent of all purchase loans originated during the 12-month survey period and was voluntary, with responses received from only 9 percent of those mailed the 127-question survey.[i] Data on the importance of first-time homebuyers for non-agency loans are not available to our knowledge from any source. The Combined FBMSI is calculated from the loan-level data in the Agency FBMSI, along with assumptions for the non-agency loans that we believe to be reasonable.
The Combined FBMSI percentage of first-time buyers is much higher than that estimated by the NAR. For the July 2013-June 2014 period covered by the NAR’s 2014 survey of homebuyers and sellers, the Combined FBMSI showed an average share of 50 percent, substantially higher than the NAR’s survey result that first-time homebuyers took out 36 percent of the mortgages used to buy a primary residence. This gap largely appears to reflect a difference in the definition of first-time buyers.[ii]
However, even after accounting for the gap, the Combined FBMSI tells a very different story about the recent role of first-time buyers than does the NAR survey. As noted above, the Combined FBMSI shows that the first-time buyer share has changed little over the past two years apart from seasonal variation. In contrast, the NAR survey shows a sharp drop in the first-time buyer share for the July 2013-June 2014 period relative to the prior year. This drop appears inconsistent with the loosening of credit standards across those two periods and with the continued improvement in economic conditions.
“April’s results continue to show that first-time buyer volume and share remain strong, showing little variance beyond seasonal trends,” said Edward Pinto, codirector of the American Enterprise Institute’s (AEI’s) International Center on Housing Risk.
“A recent Urban Institute study of first-time buyers confirms the results we have been reporting for some time,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk. “These results are contrary to the drop in the first-time buyer share shown by the NAR measure.”
AEI’s Agency First-Time Buyer Mortgage Risk Index (FBMRI) estimates the share of first-time buyer mortgages that would default in a stress event comparable to the 2007-08 financial crisis based on the actual performance of loans originated in 2007. The Agency FBMRI stood at 15.28 percent in April, up 0.2 percentage point from the average over the prior three months and up 0.9 percentage point from a year earlier. As indicated in the chart below, the Agency FBMRI is nearly 6½ percentage points higher than the mortgage risk index for repeat homebuyers.
The higher risk for the mortgages taken out by first-time buyers is largely due to risk layering. As shown in the table below, in April 2015, 70 percent of first-time buyer mortgages had a combined loan-to-value ratio (CLTV) of 95 percent or higher, and 97 percent had a 30-year term. Given the combination of little money down and slow amortization, these buyers will have very little home equity for a number of years unless their house appreciates substantially. In addition, about one-fifth of first-time buyers taking out mortgages had a FICO score below 660, the traditional definition of subprime mortgages, and one-quarter had total debt-to-income ratios above 43 percent, the limit set by the Qualified Mortgage rule. The mortgages taken out by repeat buyers are less risky along two dimensions in particular: a much smaller share had a CLTV of 95 percent or higher and a smaller share had a FICO score below 660.
Characteristics of Mortgages Taken Out by First-Time and Repeat Homebuyers
|CLTV ≥ 95%||30-year Term||FICO < 660||DTI > 43%|
|Source. AEI International Center on Housing Risk, www.HousingRisk.org|
This risk profile for first-time buyers implies that the supply of mortgage credit to this group is not tight. In April 2015, the median first-time buyer with an agency mortgage made a downpayment of only 3 percent, or $7200 in dollar terms. Moreover, the median FICO score in April for first-time buyers with agency mortgages was 705, slightly below the median of 713 for all individuals in the United States with a score.[iii] For first-time buyers with FHA-insured loans, the median FICO score in April was only 672, well below the middle of the distribution for the U.S. as a whole. These data are a strong counterpoint to the frequent claims that first-time buyers face difficulties in obtaining mortgages.
“The first-time buyer MRI hit a series high of 15.28 percent in April, moving deeper into the high risk loan category,” said Pinto. “This growing leverage puts the housing market at risk given interest rates are at historically low levels and American households are facing increasingly sharp swings in income and expenses.”
“One hears all the time that first-time buyers have limited access to mortgage debt. But this isn’t true,” said Oliner. Many first-time buyers with low FICO scores and little money down are buying homes every month.
The FBMSI and FBMRI are objective and transparent measures of the first-time buyer share and the riskiness of first-time buyer mortgages, respectively, based on the millions of loans contained in the National Mortgage Risk Index (NMRI) database developed by AEI’s International Center on Housing Risk. The FBMSI, FBMRI, and NMRI are updated monthly. For more information about these indexes and the work of the center, please visit HousingRisk.org or contact Edward.Pinto@AEI.org or Stephen.Oliner@AEI.org.