In April, first-time homebuyers made up nearly 40 percent of home purchases, marking a new high since a special tax credit for first-time buyers expired in 2010. First-time buyers represent one of the real signs of housing-market health, since, as one analyst puts it, other buyers are largely “rearranging deck chairs.” Therefore an uptick in first-time buyers is a welcome development to many.
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Not to all, however. First-time buyers are benefitting from a loosening in down payment requirements. Just over half of first-time buyers in the first quarter of 2015 made a less-than-10-percent down payment, and this is a figure that has been slowly ticking up, from a recent low 46 percent in the third quarter of 2013. That makes some analysts nervous as they recall the role that subprime mortgages played in the development of the financial crisis.
We are alert to a replay of the egregious practices that led to such phenomena as NINJA loans in the lead-up to the crisis — loans to borrowers with “no income, no job, and no assets.” However, we think it’s an exaggeration to characterize the current slight decrease in banks’ risk aversion as comparable to those excesses. In fact, lending standards are still quite tight. The average FICO score for a new mortgage borrower in April was 729 — actually higher than a year ago, when it was 726.
There seem to be four forces pushing first-time buyers to take the plunge.
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First, as we have noted before, the labor market is tightening and the first signs are appearing of increasing wages — and along with this, the optimism of consumers is increasing. This psychology is making first-time buyers more willing to step into the market.
Second, rents have been increasing, and apartment vacancies have been tight for a long time, in spite of continued strength in multi-family construction. Nationwide, rents are expected to rise 3.3 percent this year. Many first-time buyers are doing the math, and determining that their mortgage payment won’t be much more than prospective rent.
Third, the slight relaxation in down payment requirements means that first-time buyers who haven’t been able to save a 20 percent down payment over the past seven years can now buy with a 10 percent down payment.
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And fourth, prospective buyers are aware that interest rates are at historic lows and are about to start rising, and they want to take advantage of them before the inevitable reversal ensues.
Investment implications: The accelerating return of first-time homebuyers to the market is being driven by improved consumer psychology, a tighter labor market, improving wages, tight rental supply and high rents, easing down payment requirements, and consumers’ views that interest rates will begin rising soon. A strong showing from first-time buyers is one barometer of a healthy housing market, and that in turn is one more sign suggesting that the U.S. economy continues to strengthen. Investors can gain quick exposure to the industry through either of the two large homebuilder ETFs: the iShares U.S. Home Construction ETF (NYSE: ITB) or the SPDR Homebuilders ETF (NYSE: XHB).
For more commentary or information on Guild Investment Management, please go to guildinvestment.com.
