The current housing recovery is an uneasy one. Even as it unfolds before our eyes, with home sales and prices steadily rising and talk of underwater homes giving way to talk of bubbles, there is a sense that something is very wrong. According to Lawrence Yun, the Chief Economist for the National Association of Realtors, the recovery’s missing link is that there are too few sales to first-time home buyers – often equated with millennials.
Why are too few sales to first-time buyers so troubling? One reason is that it can dampen the housing recovery. Another is that it could reflect a substantial shift with respect to who can afford a home. In some parts of the country, the ability to transition into homeownership is now the privilege of a more financially select group than it was a decade ago (stay tuned for an upcoming blog post).
This blog post takes a step back to look at the data and substantiate the claim that there are currently “too few” sales of homes to first-time buyers. Using data from the National Association of Realtors and the U.S. Census, we plotted the total number of home sales and the estimated number of sales to first-time buyers over the last 25 years.
The data indicate that since the recovery began in 2012 total home sales have significantly increased, while sales to first-time buyers have remained almost flat. The divergence is in stark contrast to the earlier boom and bust years, during which sales to first-time buyers moved in tandem with total home sales, increasing until 2005 and decreasing thereafter. Thus, even though almost two million homes are sold to first-time buyers each year, the recovery – as reflected through the number of home sales – owes predominantly to repeat buyers.
Millennials are almost certain to buy more homes in the next few years than any other generation simply by virtue of being in their prime home-buying years, but the concern that first-time buyers are not buying enough homes means they are buying fewer homes than would be expected given the historical norm. From 1990-2005, first-time buyers’ national share of home sales hovered between 40% and 44%, averaging 41.5% over the period.
In the graph, the overlaid curve shows the number of homes that would have been sold to first-time home buyers had their share remained fixed at the historical norm of 41.5%.1 It demonstrates the adherence of sales to first-time buyers to the historical norm throughout the 1990’s and into the 2000’s, but it also highlights the more recent deviations from it, and in particular the dearth of sales to first-time buyers during the current recovery. The latest data indicate first-time buyers accounting for just 32% of home sales.
Regional breakdown
To get a better sense of what’s going on, we broke down the data into the four Census regions, and plotted each one separately. The graphs only date back to 2005 because information on the share of first-time buyers within each region is only available from that year on. For this reason, the historical norm referred to in the regional graphs remains the national one, i.e. first-time buyers accounting for 41.5% of total home sales.
The graphs suggest that the national pattern primarily reflects the situation in the West and South, and to a lesser extent in the Midwest, but apparently not in the Northeast. The following chart quantifies the relative dearth of first-time buyers relative to the historical norm, by region.
During the recovery so far, sales to first-time buyers have been 16.5% below the historical norm. They are the farthest below the historical norm in the West, where they fall short of the norm by 23.9%, followed by the South where they fall short by 22.6% and the Midwest where they fall short by 7.2%. In the Northeast, sales to first-time buyers actually exceeded the historical norm by 3.6%.
Given the observed facts, we can move on to addressing why the share of home sales to first-time buyers has deviated so far below its historical norm and what it means for the housing market and for homeownership. We’ve taken one stab at this in a concurrent blog post, but stay tuned for more.
Notes:
1 In additional analysis – not reported here – we overlaid an additional curve that also accounts for shifts in the size of age groups. The two curves are very similar, assuring us that the deviations of the first-time buyer share from the historical norm are not being driven by such demographic shifts.
Methodology:
We obtained the total number of home sales, nationally and for each Census region, by adding up existing home sales and new home sales. The former are reported by the National Association of Realtors (NAR) and the latter by the U.S. Census. Annual figures are averages of seasonally-adjusted monthly data, up to and including October 2015. We obtained the national and regional shares of first-time buyers over time from editions of a series of NAR reports entitled “Profile of Home Buyers and Sellers” published every other year from 1981 to 2001 (except 1983), and every year thereafter through 2015. To obtain the number of sales to first-time buyers, we multiplied the total number of home sales by the appropriate first-time buyer share. Because the share of first-time buyers reported by the NAR is an estimate based on a fairly limited sample, the resulting number of sales to first-time buyers should be considered as only a rough estimate.
We chose to use data on the first-time buyer share from the NAR rather than the American Housing Survey because the latter is only up to date as of mid 2013, and we chose to use NAR data over loan data available from the Federal Housing Administration, Fannie Mae and Freddie Mac because the latter do not reflect homes bought for investment or as vacation homes (see page 4, here).
To account for years in which the NAR did not publish a “Profile of Home Buyers and Sellers” we assumed the share of first-time buyers transitioned linearly between observed years. Further, because the share of first-time buyer shares reported by the NAR in year t reflects the period from August of year t-1 to July of year t, we took the share in year t to be a weighted average equal to 7/12 times the figure reported for year t, and 5/12 times the figure reported for year t+1 (thus, the first-time buyer share for 2015 reflects only the period January to July of that year).
Our analysis is not perfect. We openly invite readers to alert us to any issues.
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