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Will 2016 Be the Year of the First-Time Homebuyer?

February 29, 2016 | By

Last year ended with a surge of new homeowners entering the marketplace, thanks to warm weather in December and November and the potential of higher mortgage rates on the horizon in 2016.

The number of existing-home sales (transactions that include single-family homes, condos, townhouses, and co-ops) rose by 14.7 percent in the month of December to a seasonally adjusted annual rate of 5.46 million, the National Association of Realtors® (NAR) reported last month. In all, sales were 7.7 percent above the same time in 2014, says NAR.

“While the carryover of November’s delayed transactions into December contributed greatly to the sharp increase, the overall pace taken together indicates sales these last two months maintained the healthy level of activity seen in most of 2015,” says Lawrence Yun, chief economist for NAR.

But What About the Young People?

The percentage of first-time homebuyers in December was 32 percent, up from 29 percent in December 2014—although the share of first-time homebuyers measured in a separate survey declined for the third straight year in 2015.

Many first-time buyers are delaying homeownership because of rising home prices and a shortage in supply, says Yun, adding that continued strong job growth and interest from potential young homebuyers will improve the number of first-time buyers in 2016.

“The recent modest improvement in first-time homebuyer share is encouraging but doesn’t yet suggest to me a breakout in the first-time buying activity,” says Patrick Simmons, director of strategic planning in Fannie Mae’s Economic & Strategic Research Group.

There are considerable variables in play that are favorable to increases in the number of first-time buyers, like continued strong population growth and an improving job market for 25- to 34-year-olds, “a prime age group for first-time buyers,” says Simmons.

Many in that age group see homeownership as more practical, financially speaking, than spending money on rent, according to Fannie Mae’s National Housing Survey™.

Despite the recent change in interest rates, lenders have said in Fannie Mae’s fourth quarter 2015 Mortgage Lender Sentiment Survey that they would continue to relax mortgage credit standards.

The Federal Housing Administration’s decision to lower annual mortgage insurance premiums, and Fannie Mae’s and Freddie Mac’s expansion of flexible, low-down payment loan offerings, may also help to expand credit availability to first-time homebuyers, says Simmons.

“But there are several crosscurrents that are inhibiting home purchase affordability, and thus also opposing a strong rebound in first-time homebuying,” says Simmons.

These factors include strong price appreciation and limited supply in the lower price tier of the sales market and the difficulty young adults may have saving for a down payment to purchase, especially in light of their high rental-cost burdens and educational debts.

“I would interpret December’s sales numbers as a hopeful sign of modest improvement, but not a sharp departure from recent sluggishness in first-time homebuying activity,” says Simmons.

 

Estimates, forecasts and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) Group guarantees that the information in this article is accurate, current or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR Group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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