During the housing boom mortgage lending was available to people with a broad range of incomes. Since the bust, first-time buyers have become a more select group, according to a new analysis of Census data by BuildZoom’s Chief Economist, Dr. Issi Rorem.
“In 2005 the annual number of first time home buyers in the U.S. hit an all-time high of 3.2 million, but by 2008 it fell below 2 million and remains below that level to this day. The relative absence of first-time buyers from the current housing recovery should worry us because it can dampen the housing recovery, but also because of its social implications,” says Rorem.
Fluctuations in the number of first-time buyers go hand in hand with changes in their nature: when buying a home gets more challenging it is the least financially able who drop out of the race first, and vice versa, argues Rorem, who reviewed data from the Annual Social and Economics Supplement of the Current Population Survey (CPS ASEC), a joint project of the Census Bureau and the Bureau of Labor Statistics to find that the average household income of first-time buyers since 1999, when the question “why did you move?” was first asked. It references first-time buyers’ income against that of all other households, i.e. the general population, and reports both annual household incomes and a five-year moving average, whose smoothing helps discern the long-run picture. (See below)
While income in the general population remained fairly stable during the housing boom, first-time buyers’ income dropped significantly. The ease of borrowing during the boom allowed households that couldn’t previously afford a home to buy one, and the inclusion of such households among first-time buyers reduced the group’s average income.
Since the housing boom ended. Although average household income fell during the Great Recession and has yet to fully recover, first-time buyers’ income substantially increased. It spiked in 2008 when lending dried up at the peak of the financial crisis and then subsided in 2009 and 2010 when the First-Time Homebuyer Credit was in place, but overall it has risen, and is now back to its level circa 2000.
Since income has risen, Rorem credits two factors with the decline of first-time buyers:
- Tightened lending standards by requiring larger down payments, lower debt-to-income ratios and better credit scores, which was enough to preclude many from buying a home. The restriction of credit disproportionately affected first-time buyers, who rely most heavily on mortgages, and among them it had the greatest effect on households whose financials were the weakest. When homeownership slipped out of reach for these households their earnings stopped counting towards first-time buyers’ average income, so the average increased.
- As the recovery gains steam, rising home prices inflate the required down payment and at the same time rents that are rising faster than incomes make it harder to save towards one. The result is the same: as the least financially-able households are excluded from buying, first-time buyers’ average income rises.
“Given the role of irresponsible lending practices in bringing about the housing boom and bust, it is a good sign that the current cohort of first-time buyers is more financially robust. At the same time, the notion that homeownership is slipping out of reach for a growing share of the population is an uncomfortable one, especially if the trend continues. Do we really want homeownership to become a privilege rather than a choice?” he concluded.