Affordability and down payment assistance not enough for new buyers

First-time homebuyers are in a unique position these days. They’re experiencing improved affordability levels and some of the lowest interest rates ever recorded and, but facing low inventory and tough competition—all the while relying on online services and research more than ever before.

The second quarter of 2019 revealed a few trends particular to this segment of the market, as indicated in the First-Time Homebuyer Market Report recently released by Genworth Mortgage Insurance. The report highlights three overarching themes: the first-time homebuyer market did not experience a quick rebound compared to the end of last year as expected; the improved measure of housing affordability; and low down payment assistance programs and products remain at the core of mortgage financing for first-time buyers.

Overall home sales have slowed over the past three quarters, along with sales specifically to first-time homebuyers. In Q2, first-time homebuyer sales were down 4% from one year ago, which means that the year-over-year growth rate in home sales to first time homebuyers underperformed the overall single family housing market for the first time. Compare that to the home sales to repeat buyers which outperformed the overall housing market in spite of falling 1% year over year.

Improved housing affordability has caused a moderate rebound in the housing market from Q4 2018, with sales up 4%. Sales to first-time homebuyers, however, have not experienced a similar improvement—in fact, sales to first-time homebuyers have declined 6% since Q4 2018. Only nine states reported increased purchase activity by first-time homebuyers in Q2: Ohio, Pennsylvania, Mississippi, Maine, Maryland, Massachusetts, Connecticut, Arkansas, and Rhode Island.

Still, first-time homebuyers are a large segment of the market. In Q2, they represented 36% of all buyers in the single family housing market and 55% of new purchase borrowers, according to the report.

“While the lack of a rebound in the first-time homebuyer market was a disappointment this quarter, the overall level of purchase activity by first-time homebuyers remained healthy at close to two million units. The potential economic opportunities from serving the first-time homebuyer market are important to the housing industry,” writes Tian Liu, chief economist for Genworth MI.

Housing affordability has declined over the past few years, beginning with a slow rise in interest rates and enormous growth in home prices across much of the country. These factors became a barrier to some first-time homebuyers, and the housing market slowed in Q4 2018 as a result. That quickly reversed in Q1 2019, however, as home price growth continued its slowdown that begun earlier in 2018, and lower home prices—and a decision on monetary policy—allowed more buyers to break into the market.

The 30-year conventional mortgage rate dropped by 36 basis points over the last quarter to 4.01%, according to the Freddie Mac Primary Mortgage Market Survey. The interest rate for first-time homebuyers, however, remained 50 basis points higher, at 4.51%. First-time homebuyers have seen their mortgage rates come down by 39 basis points compared to Q1, although that’s thought to be largely a matter of timing more than anything else.

“First-time homebuyers who locked in rates in Q2, but closed in Q3, will likely see lower rates and further reduction in monthly mortgage payments,” the report reads.

Income growth outpaced mortgage payment the growth, which was up 2% year-over-year. This represents the slowest pace of increase since 2016, and shows the continual improvement of housing affordability. Home values are still increasing, but the slower pace has resulted in a 2% decrease in mortgage payments quarter over quarter.

In spite of increasing affordability, down payment assistance programs and products are still a must-have for a majority of buyers, who would otherwise be waiting more than a decade to save enough for a down payment. In Q2, around 80% of first time homebuyers utilized such programs, proving their continued importance to the mortgage industry. The low down payment conventional mortgage is the most widely-used mortgage product for first-time homebuyers, and accounted for 36% of all first-time homebuyer purchases. In Q2, it was used by 201,000 first-time buyers, which is a 6% increase since last year.

Government loans, however, continued to shrink in popularity. These loans accounted for 41% of first-time homebuyers, although that’s down 9% year-over-year. FHA loans, which have traditionally been the most-used government loan product by first-time homebuyers, were down 5% year over year in Q2, and VA loans saw the biggest percentage decrease at 22% year over year in Q2.

“The improving housing affordability is a promising development that should make it more attractive for potential first-time homebuyers entering the market, especially in an environment of rising economic uncertainty. Access to low down payment mortgages remains at the core of mortgage financing for first-time homebuyers, and the success of private mortgage insurance in the past few years shows that private capital can play a bigger role in housing finance and support homeownership,” Liu writes.