Are First Time Home Buyers in Dire Straits?
No Need to Panic: NY Fed Data Suggests Their Relative Prospects Are Improving
Photo Credit Agence Presse/Getty Images, Published in WSJ Online Edition
First Time Buyers (FTB) are being squeezed out of their home ownership dreams trumpets a study by the powerful National Association of Realtors (NAR).
The NAR’s “2024 Profile of Home Buyers and Sellers,”surveyed a sample from July 2023 through June 2024. During this period, FTB represented 24 percent of home sales (which included all cash sales), vs. 32 percent in the prior year period, which was the lowest ratio since 1981, when the series was first compiled. Sounds like a crisis on its face.
Based on the squeezing out premise, the Urban Institute issued a study which proposed providing assistance for FTB, who are renters, with the 3.5% minimum FHA mortgage down payment ($362,700 home used in the example), as well as assistance with closing costs which vary wildly by locality. The Great Mortgage Crisis of 2007 originated as an answer to a similar premise: the national rate of home ownership was too low, and needed to be increased. What could be a more noble objective? When the dust had settled, the Federal Housing Authority (FHA) absorbed all the losses from the defaulted mortgages, while Fannie Mae and Freddie Mac, the two Government Sponsored Enterprises (GSE) which had worked on securitizing the originated mortgages were put under government administration for several years afterwards until the losses had flushed through financial markets and the government coffers. A GAO study gives some historical background.
Donghoon Lee is part of large team at the NY Federal Reserve Bank have been producing and analyzing the authoritative and widely respected Consumer Credit Panel (CCP), so I cite his February 3rd report in references below.
Dr. Lee notes that NAR study referenced above, sent out 189,750 surveys to “a representative sample” of buyers and sellers. The survey response rate was a measly 3.6%, or only 6,817 surveys on which to base an analysis and policy solution to a “crisis” which may have just sprung from a survey with an unreliable foundation.
By contrast, the Consumer Credit Panel has access to anonymized data from the credit bureau Equifax. The file has quarterly data on the liabilities of a dynamic sample of some 14 million individuals. The Fed identifies FTB as households that have never had a mortgage lien.
The NY Fed analysis focuses on how FTB are doing relative to repeat buyers in their share of new purchase mortgages. If they were being crowded out of this fevered market, we would expect to see the FTB share declining as a percentage of new purchase mortgages. The Fed data shows that the FTB share of all new purchase mortgages hit its lows in 2004-2006 at 40% and slowly began moving up to the 2011-2012 period until it hit 50% in 2022.
Much better economic data series like those embodied in the NY Fed Consumer Credit Panel provide a much stronger basis for understanding the extent of an issue, and they also provide a platform for launching discussions about appropriate policy responses.
Extending mortgage assistance payments to certain groups of FTB would just invite a reprise of the Great Mortgage Crisis, which inflated housing prices, issued mortgages to millions of unqualified buyers, and resulted in lenders securitizing their bad mortgage pools as fast as they could to foist them off on yield-hungry investors. A few select references will be given below for interested readers. This is a lousy idea on a national scale.
Instead, the NY Fed suggests that perhaps resources and assistance might be directed to local governments to increase the supply side, by creating more moderate income housing developments with a mix of homes and apartments, perhaps by streamlining the various inspection, permitting and certification processes for approving these developments and getting the units into the marketplace. Local governments are dependent on state aid, and state aid has been flattening as various federal handout programs have distributed thousands of millions directly to consumers and to small businesses, much of it to fraudsters. State governments are looking for revenue sources, and are predictably raising property taxes, creating special levies, and even laying off workers.
The market for existing home is still frozen in many places. Most rational people would rather have a root canal than to go through the torture of selling their homes, dealing with unprofessional, lazy realtors, and having strangers traipsing through their homes gawking. Even if a home sold, where would the homeowner go? Generally, these homeowners would want to be downsizing into townhome condominiums; but these are massively overpriced, the construction quality is shoddy, interest rates are high, as are association fees, and in ten years, these units will have lost most of their economic value.
A new presidential administration with some fresh approaches to the markets might be able to kickstart a worthy venture to free up the market for new and existing homes.
References
· [i] Household Debt and Credit, the NY Federal Reserve Bank
https://www.newyorkfed.org/microeconomics/hhdc/background.html
· Liberty Street Economics: Are First Time Homeowners Facing Desperate Times?
· Atif Mian and Amir Sufi, “The Consequences of Mortgage Credit Expansion: Evidence From the 2007 Mortgage Default Crisis. National Bureau of Economic Research Working Paper No.13936. April 2008
https://www.nber.org/system/files/working_papers/w13936/w13936.pdf