First-Time Homebuyers Find Relief with Private Mortgage Insurance
By Tian Liu, Chief Economist, Genworth Mortgage Insurance
We see that prices and costs are rising in the homebuyer market, but how do we maintain growth, especially with first-time homebuyers? Historically, first-time homebuyers have relied on mortgage products that allow for lower down payments (loan-to-value greater than 80%), demonstrating that down payments can be a barrier to entry into the housing market for first-time homebuyers when compared to repeat purchasers. Supporting this point, 454,000 (79%) of first-time homebuyers used low-down payment mortgages this quarter. Policymakers, lenders, and housing advocates pushing for increased homeownership should take this factor into account. While this percentage hasn’t increased over the last year, it is up four percentage points over the past three years.
Government lending has long been a critical tool for first-time homebuyers. However, during the second quarter, government lending programs were down 5% from a year ago, helping 252,000 homebuyers. Homebuyers using these programs represented 44% of all loans, its lowest level since the first quarter of 2008. Government programs were necessary during the housing crisis, but the first-time homebuyer market is no longer in need of this level of government assistance. This diminishing presence has many borrowers and lenders moving to better alternatives.
Conventional loans with private mortgage insurance are seeing strong growth and are quickly becoming the largest source of credit for first-time homebuyers. Lenders and borrowers are increasingly turning to 97 loan to value products, allowing the private mortgage insurance industry to help 189,000 borrowers and providing credit enhancement to nearly 600,000 borrowers in 2017. Conventional mortgages with PMI are replacing FHA loans as the preferred method for guaranteeing loans. If this trend continues, conventional loans with PMI will become the largest source of credit for first-time homebuyers this year.
In the first half of 2018, 2.68 million homes were sold, with an estimated 1.76 million units leveraging financing solutions. Among the borrowers who intended to use the property as their primary residence, 980,000 were first-time homebuyers. Additionally, of the financed properties, nearly 30% used PMI-backed loans, 21% used FHA loans, 22% used below 80% LTV GSE loans, 11% used other conventional products, and 15% used other government loans (VA, USDA).
As we review 2018, we see challenges that have beset the housing market, including decreased supply, rising prices and interest rates and decreased government assistance with guaranteed loans. This situation has created new, more beneficial opportunities for conventional mortgages backed by PMI for first-time homebuyers, helping to bolster their interest and participation in the housing market, as well as continuing to be the most attractive solution for homebuyers.
Does this mean that more buyers are purchasing new homes in this market? Not necessarily. Sales growth has been moderate in that space. Most new homes are now priced at more than $300,000, as builders target more affluent buyers due to lower capacity and restrictive zoning policies.
For more insights derived from the "August 2018 First-Time Homebuyer Market Report," catch up with part one of the first-time homebuyer blog series, "Homebuying Market Remains Calm Amid Economic Headwinds" and part two, "As Demand Drives Up Pricing, First-Time Homebuyers Work to Stay on Budget."