First-time homebuyers are younger and have lower credit scores, home equity, and income than repeat home- buyers, and therefore are comparatively less likely to withstand financial stress or take advantage of financial innovations available in the market. The distributional make-up of first-time homebuyers is different than that of repeat homebuyers in terms of many borrower, loan, and property characteristics that can be determined at the time of loan origination. Once these distributional differences are accounted for in an econometric model, there is virtually no difference between the average first-time and repeat home-buyers in their probabilities of mortgage default.One takeaway is that the high prevalence of first time buyers late in the housing boom increased the danger of subsequent defaults even if banks were not loosening credit standards, because of these distributional differences. There are some interesting details to consider here.
First, if there was an increase in the number of first time buyers during the boom, and first time buyers have lower credit scores, then the relative strength of credit scores in general during that period means that, after adjusting for the effect of the larger number of first time buyers, banks had to be tightening credit standards even more sharply among repeat buyers for the average credit score to remain high. This is further evidence that banks were accounting for the factors that might have been raising FICO scores of repeat homebuyers.
The paper begins:
While there are widely-perceived benefits of homeownership and overwhelming support for homeownership in the United States, the Great Recession also brought to the fore the perils of unsustainable homeownership. During the crisis, a record number of homeowners became unable to pay their mortgages and many lost their homes. According to a Core Logic report in October 2014, there were 7 million foreclosure completions in the United States since the second quarter of 2004 when the homeownership rate peaked (equivalent to 15 percent of all mortgages) and over 5 million of those foreclosure completions occurred since the financial crisis began in September 2008.The narrative that homeownership was unsustainable is a prior here, not an interpretation of the data. The author even points out that there were less than 500,000 foreclosures per year for the first four years after homeownership peaked, and at almost all of the foreclosures happened after September 2008 - after home values in the major cities had fallen 25% from their peaks. A record number of homeowners didn't become unable to pay their mortgages during the crisis. A record number of homeowners became unable to pay their mortgages after the crisis. The fact that more than 5 million homeowners were foreclosed on after September 2008 is says little or nothing about the sustainability of homeownership in 2004. Delinquencies and foreclosures spiked in late 2008 and 2009, but homeownership has been declining fairly linearly from 2005 to today. There is enough of a parallel here to make these issues look like they are related, if we are primed to see them as related.
First Time Homebuyers, Home Values, and Interest Rates, and the Timing of Events
1) Home purchases by repeat buyers peaked in 2003. This was relatively early in the price boom and before the sharpest increases in price. The portion of homebuyers that were existing homeowners has fallen consistently since 2003. Consider this trend in light of the notion that the height of the boom was fueled by homeowners who were propping up their spending with real estate capital gains. Originations by repeat buyers were about as high in 1998 and 1999 as they were in 2004-2007, even though home prices in the 1990s had been declining relative to incomes. New home purchases were increasingly made by new buyers, who would not have had balance sheets that were artificially boosted by real estate gains. In fact, as prices rose, these buyers would have needed to save more to increase their down payments just to keep Loan To Value levels (LTV) stable, as property values rose.
this recent post, banks are generally only lending generously to the top quarter or so of households (by credit quality). Entry level home buyers can't qualify for mortgages. But, note the disconnect between entry home sales levels and the relative number of new buyers versus repeat buyers. What we are seeing is that households that kept their homes are sitting on capital losses that have damaged their financial flexibility. The data in this study counts households that have not owned a home in 3 years as new homebuyers, so I suspect that many of these new buyers are former homeowners who sold or defaulted on their previous homes. In any case, there is not a lack of new homebuyers. There are a relatively normal number of new homebuyers. Where we are short is of households around the median financial level who can get mortgage credit in today's environment and households who have weathered the real estate bust with enough home equity to facilitate a transaction.
4) Here are two graphs regarding incomes of homeowners since 1992. Homeownership rates began increasing in 1995 and peaked in 2004. During this period, the average dollar banks lent out went to the household at about the 85% income level. The income profile of the typical mortgage holder wasn't changing. At the peak of the boom, from 2004 to 2007, after homeownership rates began to decline but prices were still high, the average relative income of mortgage holders increased. During that time, the ownership rate of the top 40% of households (by income) increased and the decrease in homeownership came from the bottom 60% of households. We might be tempted to look at the figure from the paper and assume that the jump in first-time buyers was part of a last gasp effort by the mortgage industry to rope in marginal households. There are many anecdotes along these lines. The data says that lower income households were net sellers during that period and that the buyers at the end of the boom were increasingly high income.
5) Remember that homeownership rates peaked in 2004. So, the period with the sharpest rise in first-time buyers, between then and 2007, happened when there was a fall in the ownership rate. There must have been an unusual churn in the pool of homeowners during that time. As pointed out above, that churn, on net, was of higher income households buying and lower income households selling.
Since prices topped out at the end of 2005, but rents were rising sharply, this period from 2006-2007, when first-time homebuyers surged, actually had sharply falling Price-Rent ratios.
The fall in homeownership and the collapse in housing starts were the first stark signs of the liquidity crisis. By then, households weren't using home equity LOCs as ATMs; households were getting out of the real estate game - especially households with lower incomes. Between the first-time buyer originations shown above through Fannie and Freddie, and the decline in homeownership, nearly 3 1/2 million households must have exited homeownership during the 2005-2007 period, plus however many first time buyer originations happened outside the enterprises during that period.
(As a side note, I wonder if the liquidation of home equity that came from this transfer of ownership was one factor that buoyed the stock market until late 2007.)
Characteristics of First Time Buyers
There are a lot of graphs in the paper showing characteristics of first-time and repeat buyers. Some can fit the conventional narrative. There was a positive skew in Payment-to-Income and Debt-to-Income ratios that raised the average PTI and DTI during the boom for both first-time and repeat buyers. At the risk of seeming stubborn, I will point out that:
(1) In the aggregate during this period, households were adjusting to rent inflation by maintaining nominal housing expenditures, thus lowering real housing expenditures. But, rent inflation, especially in the supply-constrained large metro areas, has been creating cost pressures for both renters and buyers. In other words, the positive skew here was coming from the higher cost of housing, centered in supply-constrained metro areas, not necessarily from a higher cost of owning relative to renting.
(2) Counterintuitively, payments should increase in a low real interest rate environment. Also, an environment where rent inflation is persistently higher than non-rent inflation is mathematically similar to having even lower real interest rates, and mortgage payments should be relatively higher at the inception of the mortgage, since the advantage of ownership comes from lower payments in future years.
There are several characteristics which don't fit the standard narrative, and which point to the constricted mortgage markets that have been in effect since the crisis. Incomes for both first-time and repeat buyers were stable through the boom, confirming the data I have previously referenced from the Survey of Consumer Finances. In the later boom years, incomes of repeat buyers appears to have risen at least as strongly as first-timers, and in the constrained post-bust market, incomes of all buyers have had to be very high. Data from several sources (survey data, conventional loans, and subprime loans) now fails to back up the idea that homeownership and home prices were inflated through systematic predatory lending to lower income households.
FICO scores increased throughout the boom for both first-time and repeat buyers. In 2006 and 2007, when there was a surge of first-time buyers, their average FICO scores did fall back to the average FICO levels of the 1990s. Since this same cohort had rising incomes, this may reflect the influx of households with higher incomes, but some other characteristic that created obstacles to mortgage credit, who were willing to take non-prime terms in order to escape rent inflation exposure. Since the crisis, FICO scores for both types of buyers have risen to above previous norms, mostly because only about 10%-15% of mortgages are going to FICO scores under 700 points, which was close to the average FICO score for new mortgages in the mid-1990s.
Average Loan-to-Value (LTV) was stable until 2004. From 2004-2006 LTVs decreased for both first-time and repeat buyers. LTVs then increased to a level above the previous norm for first-time buyers for one year, 2007, before falling to levels below the previous norm since then for both types of buyers. By 2013, LTV had climbed back to the previous norm.
As with other reports I have looked at, delinquencies appear to be overwhelmingly a product of capital losses beginning in 2007. First-time buyers have a naturally higher default rate, because of the difference in their characteristics, but considering that the most significant difference is probably a higher LTV for first-timers, it is surprising that there weren't more defaults among that group as prices dropped. It looks like many homeowners have decided to ride out the crisis with negative equity.