First-Time Homebuyer Surge Complicates Housing Market

An increased supply of low down-payment mortgage products — for loans in which buyers put down 20% or less of the purchase price — has facilitated first-time homebuyers' entry into the purchase market, with demand reaching its highest level since the third quarter of 1999. (Such loans typically require private mortgage insurance.)

Seventy-eight percent of first-time homebuyers used a low down-payment product during the third quarter, financing 467,000 sales, a 5% year-over-year increase.

Liu said first-time homebuyer growth was shifting the mortgage industry landscape in favor of the private sector. The private mortgage insurance industry insured 181,000 loans to first-time homebuyers during the third quarter, up 19% from a year ago and its highest level since the second quarter of 2007.

In contrast, the FHA program is beginning to contract. FHA loans fell by 6% from a year ago to 197,000 loans for the quarter.

"These trends suggest that the private mortgage insurance industry will likely become the largest source of credit enhancement for the first-time homebuyer market soon, taking over from the FHA," Liu said. 

The large influx of first-time homebuyers is creating a unique challenge in the housing market, according to Liu. These buyers do not have a home to sell — a big reason why housing inventory has been declining, while sales and price growth have been rising.

Moreover, the rising demand from potential first-time homebuyers has not been met by a big increase in homes priced below $250,000, a price point chosen by many first-timers, according to Liu. The demand for affordable homes is increasing by hundreds of thousands of units a year, but the mix of those in the preferred price segment is down compared with 2011.

This demand-supply disconnect means that home price gains will continue. Liu said that while many forecasters were predicting a slower pace of home price growth, Genworth considers that unlikely in 2018. "In fact, our expectation that the conforming loan limit would rise to around $450,000 in 2018 was already fulfilled even before the release of this report," he said.

"In addition to rising home prices, we also expect some potential homebuyers facing less urgency in making a buying decision to stay on the sidelines or pursue other options such as hiring contractors to upgrade."

— Check out Top 10 Cities for Millennial Homebuyers on ThinkAdvisor.