Efforts within the spring of 2020 to comprise the unfold of COVID-19 resulted in a pointy contraction in U.S. financial progress and an unprecedented, fast rise in unemployment. Whereas the primary wave of the pandemic slowed the spring housing market, house gross sales rebounded sharply over the remainder of the 12 months, with sturdy features in home costs. Given the rising home costs and persevering with excessive unemployment, issues arose that COVID-19 may have negatively affected first-time homebuyers. Utilizing a new and more accurate measure of first-time homebuyers, we discover that these consumers haven’t been adversely affected by the pandemic. On the similar time, features from decrease mortgage charges have gone to current owners and to not households buying their first house.
The sturdy efficiency of the housing market throughout 2020 is mirrored each by way of the amount of house purchases in addition to the expansion in home costs. The chart under reveals whole buy mortgages by 12 months, damaged down into first-time homebuyers (FTBs) and repeat consumers. The information are based mostly on new mortgage liens on family credit score recordsdata, and so is not going to replicate any “all money” house purchases.
The annual tempo of latest buy mortgages has been trending greater since 2011. This growth accelerated in 2020, with buy mortgage quantity rising 10.5 p.c, in comparison with 6.0 p.c in 2019. Equally, home costs rose 9.2 p.c in 2020 in comparison with 3.6 p.c in 2019, in line with CoreLogic, reflecting sturdy demand and comparatively low inventories.
Utilizing a big consultant pattern of U.S. family credit score recordsdata, we will establish a FTB as the primary occasion of a mortgage lien on a family’s credit score file. The share of latest buy mortgages taken out by FTBs annually is proven within the chart under.
We discover that in 2019, previous to the COVID-19 outbreak, the share of FTBs amongst all buy mortgages (excluding all-cash purchases) was 48.2 p.c. In 2020, the FTB share elevated to 48.8 p.c, versus the decline based mostly on NAR survey data. This slight enhance can also be in sharp distinction to the 8.5 proportion level decline within the FTB share following the monetary disaster. The FTB share has been trending up since 2013 and is now basically again to its stage in 2000.
In the meantime, rising home costs pushed up mortgage balances for each FTBs and repeat consumers. The chart under reveals the common mortgage stability over time for the 2 kinds of consumers.
The common mortgage origination stability for FTBs elevated by 10.2 p.c in 2020, greater than triple the tempo of three.2 p.c in 2019. Equally, mortgage balances for repeat consumers elevated by 12.1 p.c in 2020 after remaining comparatively flat in 2019 (a rise of solely 0.8 p.c).
Rising home costs and a weak labor market may be anticipated to create affordability issues for FTBs, resulting in a decrease FTB share in 2020. Why did this not happen? Had been FTBs in 2020 comparatively older and thus had greater incomes and extra time to avoid wasting for a down fee? The subsequent chart offers information on the common age of FTBs and repeat consumers.
As a substitute of rising, the common age of FTBs truly declined barely, to 36.1 years in 2020 from 36.5 years in 2019.
The month-to-month funds on a home depend upon each the mortgage stability and the mortgage fee. S&P World experiences that the common fee on a thirty-year fixed-rate mortgage fell from 4.75 p.c in 2019 to three.77 p.c in 2020. For FTBs, this decline in mortgage charges utterly offset the rise in home costs (and consequently mortgage balances). Primarily based on our credit score panel information, the common scheduled month-to-month fee for a FTB declined barely from $1,625 in 2019 to $1,598 in 2020.
Along with having the ability to afford the month-to-month principal and curiosity funds on a house, a FTB should additionally accumulate ample financial savings to make a down fee. Larger home costs could make saving sufficient for a down fee much more difficult for FTBs. Nonetheless, if households invested their down-payment financial savings in broad fairness market indices, their after-tax return in 2020 would have exceeded the rise in home costs. Beneficiant pandemic stimulus checks and automated forbearance on federal pupil loans may probably have helped FTBs save for a down fee as effectively.
If FTBs had been dealing with difficulties in making a down fee as home costs elevated, they might both have tried to make a smaller-percentage down fee or have sought down-payment help. CoreLogic offered us with common down-payment percentages for FTBs (utilizing the official definition for FTB of not proudly owning a house within the final three years). In 2019, the down fee for FTBs was 8.9 p.c, on common. In response to rising home costs, this proportion declined barely in 2020, to eight.6 p.c.1
Debtors utilizing Federal Housing Administration (FHA)-backed mortgages can use down-payment help (DPA) to scale back the burden of saving for a house. Nonetheless, the FHA doesn’t get away DPA use by FTBs and non-FTBs, though FTBs symbolize 70 p.c of FHA buy mortgages in 2020, based mostly on our information. Using FHA DPA elevated barely from 39.3 p.c in 2019 to 39.8 p.c in 2020.2 Each the decrease down-payment percentages and better use of DPA point out that some FTBs confronted challenges in buying a house in 2020 however that credit score markets had been in a position to accommodate them.
The COVID-19 well being disaster despatched the economic system into a pointy recession, leading to an unprecedented enhance in unemployment. On the similar time, low inventories and powerful demand led to quicker features in home costs. Regardless of these challenges, the share of FTBs truly elevated barely in 2020. The decline in mortgage charges offset rising home costs to maintain month-to-month funds roughly unchanged. This consequence illustrates that in a market with low stock and powerful demand, the profit from decrease mortgage charges goes to sellers and never first-time consumers.
(1) We thank Frank Nothaft of CoreLogic for offering these tabulations.
(2) Desk B-10, web page 98. https://www.hud.gov/sites/dfiles/Housing
Donghoon Lee is an officer within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.
The right way to cite this submit:
Donghoon Lee and Joseph Tracy, “How COVID-19 Affected First-Time Homebuyers,” Federal Reserve Financial institution of New York Liberty Road Economics, April 12, 2021, https://libertystreeteconomics.newyorkfed.org/2021/04/how-covid-19-affected-first-time-homebuyers.html.
The views expressed on this submit are these of the authors and don’t essentially replicate the place of the Federal Reserve Financial institution of New York or the Federal Reserve System. Any errors or omissions are the accountability of the authors.