Prime market for first-time homebuyers

September 17th, 2013

As investors leave the market, first-time homebuyers have an opportunity

For some time now, the booming U.S. housing market has attracted a large number of international investors. While this is good for furthering the market’s recovery, it leaves less room for domestic buyers, particularly when investors can pay in all cash. For a while, the influx of foreign buyers caused outlets to report that first-time homebuyers are at a disadvantage, and their activity is shrinking as a result. Fortunately, this no longer seems to be the case.

According to Real Estate Economy Watch, two economists from the Atlanta Federal Reserve recently performed a study to determine whether first-time homebuyer demand is truly waning. They looked at the Census Bureau’s American Housing Survey Public Use Microdata and the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, among other sources.

“We do not share the concern about weakness in housing demand going forward because we are not convinced that the data indicates a material decline in first-time buyer participation,” the study, authored by Jessica Dill and Ellyn Terry, concluded. “In comparing the trends of each series separately, we don’t find there to be much in the way of a material decline in the share of first-time home buyers over the time periods and data series we examined.”

The researchers analyzed data while keeping a strong focus on the effects of the 2009-2010 first-time homebuyer tax credit program. The results showed that when these effects were removed from the analysis, the number of first-time homebuyers during the examined period was almost unchanged.

Investors beginning to take a backseat in the market
In addition to evidence of steady homebuyer demand, other studies suggest investor activity is starting to decline, which means there is more room in the market for local buyers. According to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, only about 20 percent of home purchases in June were investor transactions. This is down from February’s high of 23 percent and also the lowest level since September 2012, Reuters reported.

“Investors helped stabilize a housing market that was in free-fall and they did so by taking advantage of fire-sale home prices [over the past few months],” Michael Feroli, chief U.S. economist at JPMorgan Chase, told Reuters. “Now you see fewer bargain prices in the market and that’s a reason investor demand is coming off its peak.”

Over time, analysts expect the number of bargains on the market will reduce even further, thereby leaving fewer incentives for investors. This should continue to open up space for first-time homebuyers.