First-Time Consumers Did Not Drive Robust Home Worth Appreciation in 2021

Donghoon Lee and Joseph S. Tracy

In Might 2022, Sam Khater—chief economist for Freddie Mac—argued {that a} surge in first-time consumers had been an essential driver of the housing market the earlier 12 months. In distinction, utilizing knowledge from the New York Fed Client Credit score Panel, we discover that the share of dwelling purchases by first-time consumers fell in 2021. This implies that different components had been essential to the fast improve in home costs in 2021. 

First-time purchaser (FTB) exercise impacts the web provide of owner-occupied houses available on the market, as an FTB purchases a house however will not be promoting a house—in distinction to a repeat-buyer, who each purchases and sells a house. The official definition of an FTB is a family that takes out a mortgage to buy a house and has not been a house owner for the previous three years. This overstates the precise FTB share (on common by round 15 proportion factors since 2002) by together with earlier owners who had been renting for at the least three years previous to their present dwelling buy. Nonetheless, the official definition of an FTB is acceptable for analyzing renters transitioning to proudly owning and their impact on internet housing provide.

We use New York Fed Client Credit score Panel (CCP) knowledge to determine FTBs utilizing the official definition. The CCP is constructed from a nationally consultant random pattern of anonymized Equifax credit score report knowledge masking 5 p.c of family credit score information. The info set allows customers to comply with a given family via time. For any family that’s acquiring a mortgage, we will decide whether or not the family has had a mortgage over the previous three years. Importantly, the CCP knowledge don’t replicate all-cash purchases. We assume that FTBs all the time finance dwelling purchases with a mortgage.

There was a rise within the quantity of FTB mortgages between 2020 and 2021. As proven within the chart under, this improve was pushed by FTBs taking out mortgages assured by the GSEs.

Rise in 2021 FTB Purchases Concentrated in GSE Mortgages

Extrapolating the 2021 GSE FTB exercise to the entire market would help Khater’s view of a big rise in general FTB exercise. In combination, although, the rise in FTB exercise in 2021 displays a development that started again in 2011. To higher gauge the influence of FTBs we normalize the variety of FTB mortgages by a measure of dwelling gross sales.

Our first measure of the FTB share makes use of houses bought with a mortgage because the denominator. The FTB share is the variety of mortgages taken out by FTBs annually divided by the entire variety of buy mortgages taken out that 12 months. The chart under exhibits the FTB share from 2002 via 2021.

FTB Share of Complete Buy Mortgages Over Time

The share of buy mortgages by FTBs utilizing the official definition has been comparatively flat since 2014. There was a slight lower on this share between 2020 and 2021 (from 61.4 p.c to 60.6 p.c). Given the habits of this FTB share, it doesn’t appear possible that FTBs had been an essential contributor to the fast dwelling worth will increase noticed in 2021.

Nonetheless, the influence of FTBs on the web provide of housing available on the market and home costs can be extra intently associated to the FTB share relative to complete dwelling purchases—not simply purchases financed utilizing a mortgage. To recalculate our FTB share to replicate complete purchases, we use knowledge from Redfin on the fraction of dwelling purchases by “all-cash consumers.” We proceed our assumption that FTBs all the time finance their dwelling buy with a mortgage and add the belief that money consumers aren’t FTBs.

Information reported by Redfin point out a 5-percentage level improve in all-cash purchases between 2020 and 2021. In consequence, as proven within the chart under, the share of FTBs as a fraction of complete dwelling purchases declined from 45.9 p.c in 2020 to 42.4 p.c in 2021. This means that money consumers had been taking market share from FTBs.

First-Time Consumers and Money Consumers as a Fraction of All Residence Purchases

If we assume that almost all money consumers intend to lease out the property, then money consumers are like FTBs in that they sometimes buy a property, however don’t concurrently promote a property. This implies that we additionally take into account the share of FTBs and all-cash consumers as a proportion of all dwelling purchases.

Including purchases by FTBs and all-cash consumers, we see that their mixed share will increase between 2020 to 2021—from 71.2 p.c to 72.4 p.c. Nonetheless, the common worth of this share over the previous ten years can be 72.4 p.c. This improve, by itself, is unlikely to have had a significant influence on “months’ provide” (the variety of houses listed on the market divided by the common dwelling gross sales monthly) or home costs.

First-time consumers differ from repeat consumers in that they demand a home however don’t provide a home. An increase within the FTB share, holding different issues fixed, will put downward strain on the months’ provide of houses available on the market and upward strain on home costs. Our evaluation exhibits that FTB purchases declined barely in 2021 as a share of complete mortgages, and declined extra considerably as a share of complete dwelling purchases. In distinction, the mixed shares of FTBs and all-cash consumers as a fraction of complete dwelling purchases elevated solely modestly. The fast home worth appreciation seen in 2021 possible displays different components, akin to a change within the desire for owner-occupied housing because of the improve in work-from-home preparations.

Donghoon Lee is an financial analysis advisor in Client Habits Research within the Federal Reserve Financial institution of New York’s Analysis and Statistics Group.

Joseph S. Tracy is a non-resident senior scholar on the American Enterprise Institute.

Find out how to cite this submit:
Donghoon Lee and Joseph S. Tracy, “First-Time Consumers Did Not Drive Robust Home Worth Appreciation in 2021,” Federal Reserve Financial institution of New York Liberty Road Economics, Might 15, 2023, https://libertystreeteconomics.newyorkfed.org/2023/05/first-time-buyers-did-not-drive-strong-house-price-appreciation-in-2021/.