New data out today from realtor.com® suggests that the share of first-time buyers planning to buy in spring 2017 fell sharply when mortgage rates began to rise at the end of last year, dropping by as much as 10% since last October. At the same time, the site said, record low inventory levels, higher prices and heavy buyer competition is creating more urgency for active home buyers.
“Last fall, we saw a large jump in the number of first timers planning home purchases, which was very encouraging because their market share is still well below pre-recession levels,” said Jonathan Smoke, chief economist for realtor.com®. “But, as evidenced by their decline in share, first-time buyers are really dependent on financing and affordability is one of their largest barriers to home ownership. This number could continue to decline with anticipated increases in interest rates and home prices.”
According to its January survey of active home buyers, 44% of buyers planning to buy in spring 2017 are first-time home buyers. This has dropped significantly since the survey was conducted in October, when 55% of buyers of planning a spring purchase indicated they were looking for their first home.
The average 30-year conforming rate rose to more than 4.2% by the end of December 2016 from 3.4% at the end of September 2016. With average rates today about half a percentage point higher than they were in 2016, a median-priced home financed with 20% down would cost an additional $720 per year in added interest. That equals more than 1% of the median household’s income.
Survey data collected by realtor.com found that first-time buyers were nearly five times more likely than repeat buyers to say they faced challenges qualifying for a mortgage, with affordability ranking highly among first-time buyer concerns. First-time buyers comprised 32 percent of all buyers in November, according to the National Association of Realtors®.
“The rise in rates is associated with an anticipation of stronger economic and wage growth, both of which favor buyers,” added Smoke. “At the same time, higher rates make qualifying for a mortgage and finding affordable inventory more challenging. The decline in the share of first-time buyers since October suggests that the move up in rates is discouraging new home buyers already.”
To date, rising interest rates appear to be having the opposite impact on repeat home buyers. Even with the current increases, interest rates remain historically low, and the movement in rates hasn’t yet tipped overall buyer demand down. It has actually sparked demand from experienced buyers trying to close before rates increase further, as evidenced by increased realtor.com® listings views and decreased inventory. In the short term, the rate movement seems to have encouraged rather than dampened overall demand.
Even after 51 straight months of a below-normal supply of homes for sale, 2017 is expected to be even more challenging. Active inventory in December on realtor.com® was down 11% compared to December 2015. As a result, the year has started with the lowest inventory of homes for sale at least since the recession, and possibly in decades. Inventory was a challenge all year but a stronger offseason in the fall depleted the available homes for sale even more than is typical.
Asking prices usually decrease in the fall, but this year the median list price in December, was the same as in July at $250,000. That represents a record price for December and a year over year gain of 9%, the highest monthly year-over-year gain in 2016.
With fewer homes on the market, average listing views were up 40% to 80% in the last three weeks of December, compared to the same time in 2015. Multiple potential buyers seem to be interested in virtually every home on the market even though we are in the slowest time of the year for sales.
