First-time Homebuyer Market Report 02

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´╗┐FEBRUARY 2019


By Tian Liu, Chief Economist, Genworth Mortgage Insurance

Genworth Mortgage Insurance has been helping first-time homebuyers become homeowners since 1981. The private mortgage insurance industry is the largest provider of private capital for first-time homebuyers, insuring 682,000 of these mortgages in 2018. We understand the first-time homebuyer segment, both the ones we serve and those served by others.

I started working on the First-Time Homebuyer Market Report in 2015. The question was both simple and important: how many homes are sold to first-time homebuyers in a given quarter? I then raised the bar higher still: by extending the quarterly series back to 1994, and reporting the latest data with a minimal lag. My approach is different from others in that I rely on government reports and industry sources. I believe this is a breakthrough, one that will help the housing industry and policymakers gain insights into the first-time homebuyer market. This report is a testament to Genworth's and my own commitment to the first-time homebuyer market.

?Tian Liu Chief Economist at Genworth Mortgage Insurance

Genworth Mortgage Insurance Corporation

?2019 Genworth Financial, Inc. All rights reserved.



The first-time homebuyer market has been an important driver in the housing market over the past four years and remains strong today. Building on the momentum of the past four years, 2018 turned out to be the best year for the firsttime homebuyer market since 2006, with 2.07 million first-time homebuyers.

During the second half of 2018, however, the housing market began to slow down as affordability worsened. That trend intensified in Q4 with rising interest rates on closed sales and continued (but slower) increases in home values on like homes. Housing costs for first-time homebuyers increased by 17 percent from a year ago as home prices1 rose by almost six percent and interest rates increased by 10 percent.

The first-time homebuyer market was not immune from the intensified slowdown in the housing market, and as a result experienced a three percent year-overyear decline in Q4--its first year-over-year decline since 2014, and only the third such decline since 2012. However, the first-time homebuyer market continued to outperform the broader housing market, which saw the number of single-family home sales decline by five percent and home sales to repeat buyers decline by seven percent. The greater resiliency in the first-time homebuyer market has made this demographic more important to Realtors, lenders, and homebuilders in the housing slowdown. For example, the private mortgage insurance industry saw eight percent growth in the number of first-time homebuyers in Q4 and a record 682,000 first-time homebuyers in 2018.

For the broader housing market, sales of single-family homes recorded the biggest year-over-year decline in nearly five years and inventory began to increase by a larger margin. Homebuyers have adjusted to the worsening in affordability in different ways. Some have put off the buying decision while others decided to look for lower-priced homes. These adjustments have made it possible for the remaining homebuyers to buy homes at lower prices. As a result of that shift, the price for the top 80 percent of homes sold during Q4 by sales price declined year over year, and the pace of decline increased compared to the previous quarter. The weakness in the housing market was more pronounced in the repeat buyer segment, with sales to that segment down by seven percent.

1Based on Federal Housing Finance Agency's Purchase-Only Home Price Index, which is calculated by looking at price changes for the same homes sold over time, making the price movement independent of changes in sales mix. This measure of home price answers the question of how much a homebuyer would have to pay for the same house over time. In contrast, the median home price and home prices at other points of the price distribution discussed in this report are influenced by changes in the sales mix.

Genworth Mortgage Insurance Corporation

?2019 Genworth Financial, Inc. All rights reserved.


Growth in the first-time homebuyer market remained healthy in Florida, South Dakota, West Virginia, Vermont, Wisconsin, New Mexico, and Nevada. However, when looking at state-level trends year over year, declines in the first-time homebuyer market have spread from 19 states in Q3 to 35 states in Q4. States known for less affordable housing reported lower first-time homebuyer numbers in Q4 and for the full year, including California, Washington D.C., New Jersey, and New York.

The near-term concern for the housing market is how long the slowdown will continue. Even though home sales this quarter did not benefit from lower prices and lower interest rates, lower interest rates and slower growth in home prices should help make housing more affordable in Q1 of 2019, making the environment more positive for housing. However, because the metrics on home prices, firsttime or repeat buyer activities, and state-level homebuyer activity show that the housing slowdown was still intensifying in Q4, it is uncertain how soon the market will stabilize and recover. With the breadth and depth of home price changes, state-level sales to first-time homebuyer activities will inform potential buyers of a turnaround in the housing market and boost buyer confidence.

The wave of first-time homebuyers over the past four years has already created large opportunities in the housing market and it is important to remember that many of today's first-time homebuyers will become repeat buyers over their life time, refinancing, remodeling, and creating other opportunities for the housing industry. In 2018, the surge in the number of first-time homebuyers elevated the market share of low down payment mortgages and helped conventional loans with mortgage insurance become the largest source of credit for first-time homebuyers. First-time homebuyers have also played a key role in reshaping the demographics of many states with a significant shift in homeowner population out of states such as California, Illinois, Massachusetts, Michigan, Louisiana, New York, Texas, and into states such as Arizona, Florida, Georgia, Delaware, Idaho, and Nevada.

Genworth Mortgage Insurance Corporation

?2019 Genworth Financial, Inc. All rights reserved.



The overall housing market experienced a slowdown in Q3, reflected by lower home sales, higher inventory, and slower growth in home prices. That trend spread across home sales categories and deepened in home price impact in Q4. Sales of single-family homes declined by five percent in the quarter, compared to the one percent decline in Q3, marking the biggest year-over-year decline in home sales since Q1 of 2014. Additionally, housing inventory increased in Q3 for the first time since 2014. Inventory of existing homes for sale represented 4.3 months of sales in Q3, an increase from 4.2 months of sales a year ago. It continued to increase in Q4, going from 3.5 months a year ago to 4 months in Q42.

While there are different measures for home prices, movement in home prices also provides important information about the balance of demand and supply as well as changes in housing affordability. The most common measure of home price is based on repeatsales methodology, which removes the effect of changing sales mix by comparing home price changes for the same property. One home price index that uses the repeat-sales methodology is the Federal Housing Finance Agency's (FHFA) Purchase-Only Home Price Index, which shows that the value of homes continued to appreciate in the fourth quarter (up 5.8 percent from a year ago), but at a slower pace compared to last quarter's growth rate of 6.3 percent. Another measure of home price is based on prices of typical home sales within the quarter, with median home price (with 50 percent of sales at higher prices, and 50 percent of sales at lower prices) being the most common. In the fourth quarter, the median home price and home prices for the top 80 percent of home sales by sale price declined (Fig. 1 Home Price Declines Intensified in Q4). In addition, the price declines were larger in Q4 compared to Q3, with prices down by four percent from a year ago for the 20 percent most expensive homes sold, and down by two percent for the median price. During the second half of 2018 (and the previous housing slowdown in 2013?14), homebuyers who tend to purchase higher-priced homes such as repeat buyers became more reluctant to buy due to worsening affordability, giving the remaining homebuyers more bargaining power, and allowing them to buy lower-priced homes. This explains lower sales prices at the median, top, and bottom 30 percent of the price distribution during the 2013 and 2014 periods and again during the second half of 2018, while the FHFA Purchase-Only Home Price Index merely showed a slowdown (Fig. 2 Home Price Changes Using Different Indices). It is also consistent with what many publicly listed homebuilders have said3 about housing affordability and its impact on sales.

Homebuyers have reacted to the worsening affordability by putting off buying and looking for lowerpriced homes in Q4, which resulted in lower prices paid by about 80 percent of homebuyers.

2Housing inventory, expressed as months of supply, is seasonal. The housing market has more supply during the second and third quarter, the peak home-selling season. That is why the supply of homes for sale is higher in Q3 than it is in Q4. To overcome the effect of seasonality, we use year-over-year changes in housing inventory, instead of quarter-overquarter changes.

3For example, Pulte Homes and Lennar mentioned "homebuying demand softening in response to affordability challenges" due to "higher home prices and rising mortgage rates" in their press releases (. com/investor-relations/press-releases/press-release-details/2019/PulteGroup-Reports-Fourth-Quarter-2018-FinancialResults/default.aspx, ); KB Homes mentioned that it has "taken proactive steps to reposition many of our existing and future communities to make our product more affordable." ()

Genworth Mortgage Insurance Corporation

?2019 Genworth Financial, Inc. All rights reserved.



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