The role of first-time homebuyers in the real estate market has remained remarkably constant – and hugely important – over the years. But while the role of first-time buyers hasn’t changed, the defining characteristics of first-time buyers, and what they’re looking for in a first home, is constantly evolving.
The role of first-time homebuyers in the real estate market has remained remarkably constant – and hugely important – over the years. But while the role of first-time buyers hasn’t changed, the defining characteristics of first-time buyers, and what they’re looking for in a first home, is constantly evolving.
First-time buyers are critical in the real estate food chain, purchasing the homes occupied by slightly older families, and allowing those more mature families to sell their home and move up. And when first-time buyers leave rental housing for homeownership, they help ease rental demand, making it easier for their younger brethren to get started.
First-time homebuyers today are typically older, spend more time renting prior to buying and are less likely to be married than in prior years. Interestingly, they earn roughly the same amount they always have.
But while their income hasn’t risen much, first-time homebuyers’ tastes have. Both the price and percentile (the share of homes more or less expensive than those typically sought by first-timers) of homes purchased by first-time buyers have risen – homes now bought by first-time buyers cost about $140,000, up from $113,000 in the years immediately prior to the millennium. As a result, the value of a typical home bought by first-time buyers is closer to a middle-of-the-road home than a more stereotypical entry-level home: Today, first-time buyers buy a home in the 46th percentile (54 percent of homes are more valuable). In 1997, they typically bought a 39th percentile home.
And at the same time as the home value equation is changing, the type of home sought by first-time buyers is also changing: First-time buyers are increasingly purchasing condominiums, at the expense of sales of more traditional single-family homes. The share of condos purchased by first-time buyers has risen to 42 percent, from 28 percent in 2001. Over the same period, the share of single-family homes purchased by first-time buyers has fallen from 71 percent to 58 percent.
Finally, higher home values and relatively flat wages means the price to income ratio for first-time buyers – how many times more expensive their typically purchased home is than their actual income – is going up: from slightly more than 1.5 in the early 1970s, to more than 2.5 today. Conventional wisdom may say that more expensive homes and flat wages may make lenders more reluctant to lend, but the opposite has been true in recent years. The credit scores of first-time borrowers are falling, and lenders are both relaxing debt-to-income limits, even marginally, and accepting smaller down payments. There is some cost to first-time borrowers, though: The share of loans requiring mortgage insurance protection, which protects banks in the event borrowers can no longer pay their mortgage, has risen.
Understanding what first-time buyers want and what kinds of resources they’re bringing to the market is essential in understanding the future of the housing market itself, and we’ll check in periodically on the ever-evolving first-time buyer. In the meantime, scroll through the charts below to see how the typical first-time buyer has changed in recent years.
Zillow based our first-time homebuyer analysis on two datasets: the University of Michigan’s Panel Survey of Income Dynamics (PSID) and Fannie Mae Single-Family Loan Performance Data.
In order to identify first-time homebuyers in PSID data, we followed the children of households in the survey until they purchased a home. These children are represented in the data as families split off from the original family.
Fannie Mae identifies first-time homebuyers in the Fannie Mae Single-Family Loan Performance Data as anyone who has not purchased or owned a home in the last three years.
