First-Time Buyer Indices Update on August 2018 Data

The American Enterprise Institute’s Center on Housing Markets and Finance released an update to its indices on mortgage lending practices on November 27, 2018. The release, which covers home mortgage loans originated between September 2012 and August 2018, focused on the First-Time Buyer Mortgage Share and Mortgage Risk Indices (FBMSI and FBMRI).

Contrary to recent media reports, the housing market remains robust, though it appears to have plateaued at a high level and will become more bifurcated between first-time and repeat buyers over the coming year. To understand why, one needs to examine the drivers of the housing market recovery that began in 2012. The current house price boom, now entering its seventh year, has been driven by two punchbowls: Fed policy that kept interest rates low, which equally applied to all types of buyers, and loosening mortgage underwriting standards by government agencies, which almost exclusively applied to first-time buyers.

Because Fed monetary policy is becoming less accommodating, the higher-priced part of the housing market consisting of predominantly repeat buyers will likely see a moderation in home price growth. We expect somewhat slower rates of house price appreciation in higher-priced coastal markets, and perhaps slowing transaction volume in some markets because of tax law changes and affordability pushing buyers into more affordable markets.

However, due to continued credit easing by FHA and Fannie Mae, the lower-priced part of the market consisting predominantly of first-time buyers will likely see continuing strong house price appreciation with transaction volume remaining around its current high level.

First-time buyer (FTB) mortgage risk jumped in August, helping FTBs overcome raising prices driven by continued tight inventories of homes for sale. The FTB National Mortgage Risk Index (FBMRI) for August was up .6 ppt from a year ago and up 3.1 ppts from August 2013. Setting a new series high, FHA’s First-time Buyer MRI stood at 28.6 percent in August, up 2.1 ppts from a year earlier. FHA and Fannie Mae’s outsized monthly risk increases are making entry-level homes less affordable, since in a seller’s market, prices rise faster than incomes as long as the marginal buyer, who sets the price for all, has access to higher leverage. FTB volume by count was effectively unchanged (-0.2 percent) from elevated levels a year ago.

The main drivers toward greater first-time buyer risk were:

A massive shift toward higher DTIs after Fannie and Freddie increased their DTI limit to 50 percent without compensating factors. About one-third of FTBs are having a DTI in excess of the QM “limit” of 43 percent.

Recent steps by the GSEs, the FHA, and Regulators adding fresh fuel to the long-running house price boom.

A growing share of FTBs with little or no downpayment.

“The current house price boom, now entering its seventh year, has been driven by two punchbowls: the Fed’s accommodative monetary policy, now being slowly withdrawn, and easy first-time buyer credit made available by federal agencies, which continues unabated,” noted Edward Pinto, codirector of the American Enterprise Institute’s Center on Housing Markets and Finance. “Continued credit easing for first-time buyers will offset the Fed’s tightening and fuel further unsustainable entry-level home price appreciation,” Pinto added.

The implications of leverage during a long-lasting seller’s market, now in its 73rd month, are higher house prices concentrated at the lower end of the market where leverage has been increasing the most. On the national level, a long period with few metros experiencing negative home price growth is allowing market excesses to build. Moving forward, there will be even more risk as borrowers, especially first-time buyers, are forced to take on more leverage to buy.

“Given the continued credit easing for first-time buyers with much higher risk profiles, it is too soon to speak of a turnaround in house prices,” said Tobias Peter, senior research analyst of AEI’s Center on Housing Markets and Finance. “Our past research proves that in a tight housing market as little as 30 percent of borrowers with high risk levels can effectively drive up house prices for everyone in a census tract,” noted Peter.

With the addition of the data for August 2018, the First-Time Buyer Mortgage Share and Risk Indices cover almost 8.7 million Agency purchase loans dating back to February 2013. The NMRI covers 34.7 million Agency loans dating back to September 2012, comprised of over 17.4 million Agency purchase loans and over 17.3 million Agency refinance loans. The NMRI is published for purchase loans (with separate indices for first-time and repeat buyers), refinance loans (with separate indices for no-cash-out and cash-out refinance loans), and the composite of purchase and refinance loans.

Please find data and additional materials from our monthly call below. If you would like to receive invitations to our monthly update calls, please email [email protected].

Data (Excel Files):

National Data

State Data

Methodology

First-Time Buyer Data

Periodic Tables of Housing Risk

Presentation materials:

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