ECONversations: Checking In on First-Time Home Buyers - Transcript

February 10, 2016

Paula Tkac: Welcome to the Federal Reserve Bank of Atlanta's ECONversations. We're glad you could join us today. I'm Paula Tkac, from the Atlanta Fed's research department, and I'll be your moderator. Just as a reminder, we'll be answering your questions during today's webcast. Please go ahead and submit your questions by clicking on the button on your screen. Now, I'll turn it over to policy specialist Jessica Dill to give us an update on first-time home buyers.

Jessica Dill: Thanks, Paula, and thanks everyone for tuning in for today's edition of ECONversations. Historically, real estate has served as an engine for economic growth, but in this cycle, it's been a little bit weaker. The real estate recovery has been slow going and there's been a lot of talk about why is that so, what's going on here? Today, I'm not going to answer that question completely, but I'm going to talk about one popular explanation and that is that first-time home buyers have disappeared.

First-time home buyers are often thought of as a key component for a well-functioning housing market. You need new buyers in order to purchase homes from existing buyers, who can then move up to a newer, bigger, better home. So if you don't have first-time home buyers, the theory goes, then the housing market recovery might be soft. This topic has made the headlines a lot over the past few years. Starting in 2013, there was a lot of talk about first-time home buyer market share; what's normal? Are we down from that? Then the conversation kind of shifted as we moved into 2014 to one of student loan debt. Is that holding back home buyers, in general and specifically millennial home buyers—are they having a hard time coming to the market because of this debt burden?

So, I'll talk a little bit about that, and then I'll wrap up with some analysis that I've done with a colleague here at the Atlanta Fed, Elora Raymond, on first-time home buyer trends using a unique data set that we have access to. To be clear, some of this information I'll be sharing with you today is my own data work and my own analysis with colleagues, and I'll also be highlighting findings from other researchers that I think help round out this story.

So, there are several measures of first-time home buyer market share, six that I have shown on this chart. I'd like to call your attention to the gray bar first and then the two green lines. The gray bar represents the first-time home buyer tax credit period that ran from mid-2008 to late-2010.

I'd like to call your attention to the first green line that starts in 2008 and it's a solid green line with no markers. This is a measure produced by the National Association of Realtors. It's a monthly measure and it's derived from a survey of realtors who are out there selling homes. They're asked to say what share of homes went to first-time buyers. As you can see, the series starts in 2008 and it spikes pretty early in the series to about 50 percent and then it falls after the home buyer tax credit, to about 30 percent.

The second series that I'll call your attention to is the NAR annual series. It's the green line with markers and blocks. It dates back to the late '80s and the series hovers around 40 percent before, and after, the first-time home buyer tax-credit period.

During 2013, I was approached by a colleague and this is how I came to look at this. My colleague met with a lot of real estate business contacts and he was hearing that first-time home buyers are the reason that we're seeing this slow recovery. He asked me to take it to the data and look at what's going on. He said that "I've been told that the share has hovered around 40 percent and now it's around 30 percent. What's going on here? What does the data say?"

Taking these two series that I've just described, I realized that we were taking the trend from one series and then making judgments about what's happening with another series. That might not be the best way to look at the first-time home buyer market share. So I added in these four other series. A colleague of mine, Ellie Terry, and I built the AHS 12-month moving average monthly series. It's the gray line that dates back to the 1980s. We wanted to get a feel for the longer term first-time home buyer market share. Again, it tells us something different. It's been hovering around 50 percent but what we find is that series has been kind of flat. So we tested each of these series to see if it's trending upward or downward over time. Once you account for the first time home-buyer tax credit period, which goosed demand and pulled forward some of the first-time home buyers, we found that the trend line wasn't statistically different from zero. Put differently, it's been flat over time. I thought that was pretty interesting, given this focus about this decline from a historical share of 40 percent down to a current share of 30 percent. So the takeaway here is, generally, if you look across the longer term, the first-time home buyer market share has been flat but there are several different measures. There's not a "normal" share, so to say.

Moving forward, that takes us into 2014, when the conversation shifted like I said towards one of student loan debt and how maybe student loan debt is impeding people from buying homes. Let's take a look at student loan debt data first.

On the left-hand side, I have borrowed a chart on nonmortgage balances from our colleagues at the New York Fed. The red line is student loan debt balances and it goes from 2004 to 2014. In 2004, student loan debt was about $300 billion and in 2014, it was just shy of $1.2 trillion. Again, through 2014, the most recent data is through the third quarter of 2015 and it stands at $1.19 trillion, so, again—same ball park.

So this is a steady increase and it's understandable why there's been increased concern about student loan debts, debt balances and what that's doing to things like housing market activity.

On the right-hand side, I've borrowed a second chart from the New York Fed, from our colleagues there. They've charted out student loan balances by age group. I think the interesting thing here to me is that the growth in balances isn't borne just by those under 30, it's not just a millennial thing. Student loan debt balances are growing across the age spectrum, and I thought that was noteworthy.

The U.S. Department of Education has several different data available on student loans. There's a study called The National Post-Secondary Student Aid Study. It started, or the first date available was in 2004 and it's done every four years, so 2008, 2012 and 2016 is not yet available. I took 2004 and 2012 just to compare and contrast what the breakdown of debt looks like. In 2004, you could see that about three-quarters of the population with student loan debt has balances less than $15,000, so the orange bars, the green bar, the blue bar at the bottom. This is broken out by institution, but let's focus on the public four-year.

Moving to 2012, you can see that higher balances have grown as a share of all debt but still the majority of the population has balances that are $15,000 and less. Not to make little of that, that's a lot of money, but it's somewhat comforting that we're not seeing huge growth or an overtaking in balances of $25,000 or $50,000.

Moving forward, this whole consideration of student loan debt and home ownership was first looked at by our colleagues at the New York Fed. They have charted here—this is one of the main findings from their work—the share of the population with home-secured debt at age 30. You can think about the vertical access as a home ownership rate, and that [of] the two lines that are pictured, the red line is the population without student loans and the blue line is the population with student loans. From 2003 to the early part of the recession, the population with student loans had a higher home ownership rate than those without; but coming through the recession, both rates fell. The share of the population with home mortgage debt fell and actually those with student loans fell faster. An early takeaway was that student loans must be weighing on one's ability to own a home.

A criticism of this analysis was that it doesn't really take into account educational attainment. So our colleagues at the Federal Reserve Board replicated this analysis but took it a step further; they were able to gain access to educational attainment data, as well as student loan data and home ownership rates. If you take a look at the chart on the left-hand side, it's more or less a replication of the previous chart that I just showed you.

They broke it out into four categories: the home ownership rate for those with no college education; those with no student loan debts (but they may have some college education); and then in the blue and yellow lines, those are people with a college education that have student loan debt and that don't have student loan debt. And you can see they are more likely to be homeowners before the recession, and even after the recession that fact remains.

So once you control for education, you see a little bit different of a picture; on the right-hand side, they go ahead and plot out the homeownership rate by age, so it starts at age 23 through age 35. The green line is those with no college education, and then you can see in the early years those people might have gone straight to work which might put them in a better position to buy a home. But pretty quickly, by age 25-26, the situation reverses; those with college education and student loan debt and those with college education and no student loan debt have a higher home ownership rate, and these lines basically track each other pretty closely. So, it's not completely clear that student loan debt prevents you from becoming a home owner or lowers your incidences. A takeaway was [that] it's not a matter of "if" these folks will become homeowners, but rather "when"—it's a timing issue.

One last study that I'd like to highlight that I thought had an interesting finding is one done by the Brookings Institute, also in 2014. They used the Federal Reserve Board's survey of consumer finance—that was the data source—to calculate student loan payments-to-income ratios. They, obviously on this chart, have charted a mean and a median; let's focus on the median, the darker blue line. What I find interesting is that the median payment-to-income ratio has remained rather flat over time; what this suggests to me is that, even if student loan debts have increased over time, they've increased in concert with incomes. This bodes well for housing.

That takes us to some analysis that I did with my colleague Elora Raymond here at the Atlanta Fed, using the Federal Reserve Bank of New York's Consumer Credit Panel, which is credit bureau data; we took a look at first-time home buyers. We created a flag in the dataset so that we could track these folks, and we found a few things and I'll first talk about something that isn't on the chart.

We looked at the average age of the first-time home buyer, and interestingly—given all the talk you might expect that this age has gone up over time—but actually what we found [was that] in 2001, which is when our data starts, the average age of the first-time home buyer was 35 years old. In 2014, when our data concluded for this analysis, the average age of the first-time home buyer was 33 years old. So it went down, it didn't go up, which we found really interesting.

Taking a different slice of the same data, I'll call your attention to the chart. I'd say there's fewer, but younger, first-time buyers. What we've done here, in orange: we wanted to do a generation to generation look. Are millennials different from Generation X? What we find is their home buying activity does look a little bit different, but Generation X (in orange), their home buying activity peaks between the age[s] of 27–29. Millennials, on the other hand—their home buying peaked between the ages of 24–25, and again, these folks are still coming of age. What's different is, for Generation X, there was kind of a sharp increase and a sharp fall-off in the distribution of homeowners over time. But for millennials, it's kind of a sharp increase in a similar way, but it's tapered off slowly; they're still buying at a higher rate than maybe the generation before. This makes sense given the economic conditions [during the time] that they're coming of age.

We thought this was interesting, again, that the age is trending younger, not necessarily older. Just to be clear, though, earlier I mentioned that the share has remained relatively flat over time; the number of first-time home buyers, to be sure, has declined, there has been a drop-off. To be fair, I know there's been a drop-off across all buyer segments; there's fewer home sales taking place, and so this makes sense. But what we did here is we broke out younger first-time buyers from older first-time buyers. The blue line represents the younger folks, between the ages of 21 and 35, over time. The green line is folks between the age[s] of 35 and 48. You see a drop-off; it's interesting that the decline is actually about 50 percent from its peak to trough, whereas the blue line only declined about 34 percent. So the drop-off has been a little bit greater for these older buyers.

We did some analysis to consider what explains this drop-off. Is it student loan debt? Is it maybe economic conditions? Is it credit quality? What we found is [that], to a certain extent, all of these can explain some of the drop-off, but economic conditions, locations, tended to be a stronger explainer than credit quality as well. So, taking a look here at location, I've charted the difference between 2001 and 2011, and first-time home buyers by state, and you can see on the left-hand side of the chart, California and Florida had the largest decline in first-time home buyers—and this is controlling for population. And North Dakota, on the right-hand side, had the largest increase; there's been a lot of oil industry activity there, a lot of new people moving into the state. So this picture kind of makes sense.

Moving to credit quality: interestingly, we chart here the median credit score of first-time home buyers by age. Again, [the] blue line is younger buyers, [and the] green line is older buyers. Generally, the credit scores track each other closely in 2001 and in 2014, but they diverge during the boom times. [For] the older first-time home buyers, [the] median credit score falls, suggesting that credit loosened a little bit more for those folks...and then the median credit score increased again to match that of the younger buyers, suggesting that there was tightening. This may help to explain why there was a greater decline there.

Again, looking by age, we map out the number of first-time home buyers in each credit score bracket; and, interestingly, those with credit scores of less than 610 fall off, regardless of whether you're [an] older or [a] younger first-time home buyer. If you're in a middle credit bracket, home sales fall off; and then if you are a younger first-time home buyer, they've kind of picked back up again in recent years.

For those with the highest credit score—those with 780 or higher—it actually has increased since 2001 for the younger first-time home buyers but remained flat for the older first-time buyers.

So, just to wrap up quickly, I'd like to say that even though the first-time home buyer's share has remained the same, there has been some fall-off in the number of buyers. I don't think that this first-time home buyer explanation is one that can completely explain why the housing recovery is weak. I think, just to make a point about credit tightness, credit is tight for all home buyers. On recently originating mortgages, looking at this chart here, you see that since 2008-2009, most of the mortgages originated have been to folks with credit scores of 680 or greater.

The last thought that I'll leave you with is: this credit box is a real thing. In 2000, we plotted in 2000, 2006, 2009, and 2014 FICO scores on the horizontal axis and debt-to-income ratios on the vertical axis. These are two underwriting measures that are often used when making loans, and you can see that in 2000, most loans tended to be made to people with FICO scores greater than 600, and debt-to-income ratios less than 40.

In 2006, those rules kind of...I'm not sure where those rules went. You can see loans being made all across the board. In 2009, you see some pullback, and in 2014, you see that that credit box is pretty darn tight. So, again, credit's hard to come by regardless of whether you're a first-time buyer or not. I think credit tightness is one big explanation, if I had to give one, for the weaker than expected housing recovery.

So with that, thank you for tuning in again, and I'll turn it over to Paula for some live questions.

Tkac: Thanks, Jessica. So now let's take some questions from our audience. The first question combines several questions that listeners have asked, and that is: What are the demographics of first-time home buyers look like, and how do we really define a first-time home buyer?

Dill: Paula, that's a great question. The demographics of the first-time home buyer was the main motivation for digging into this analysis, especially the last few charts that I showed you. Interestingly, depending on your data source, you're going to have limitations on what you can find out; so, we were able to find out something about location, we were able to find out something about credit quality, and then age. There wasn't information on race, or on sex in that data.

There is the American Housing Survey data, which I referenced earlier, that Ellie Terry and I used to create our first-time home buyer share, and there are some demographic data in there. We didn't mine it for our first-time home buyer study, but the National Association of Homebuilders has done that, and so if you're looking for that type of information, I'd recommend taking a look there.

Tkac: So, the next question kind of relates to putting this in the bigger picture. You mentioned at the beginning that typically, housing has been a source of strength in an economic recovery, and this time it has not. Can you elaborate a little on how significant that difference is?

Dill: Sure. I can say that before the downturn, real estate—broadly defined [as] residential construction and nonresidential structures combined—accounted for about 8.4 percent of GDP. You may not think that's huge, but that's a sizeable percent. Since the downturn, those two factors combined only account for about 5.9 percent of GDP. So again, how sizeable is that? I'd have to do a little more work to give you a concrete number, but there's definitely been a drop off that's noticeable in terms of housing and its share of GDP.

Tkac: You mentioned in one of the charts seeing an increase in the number of young people that have a credit score over 710. What is the average credit score of a first-time home buyer, and can we draw any inferences? It seems as though increasing credit scores would be a very good thing, a sign of fiscal responsibility.

Dill: We don't know the average credit score of someone that might want to be a first-time home buyer, we only know the average credit score of people that have bought their first home using this dataset. We did break it out; just to give numbers, since they are not posted exactly on the slide: In 2014, [in] young first-time home buyers, [the] median credit score was 720, while [for] older first-time home buyers, [the] median credit score was 682. That compares to back in 2001, [when] the median credit score for young first-time home buyers was 685, and for older first-time home buyers, it was 672. So, it has gone up over time. I don't know that that reflects an improving balance sheet on the part of first-time home buyers, so much as tighter credit.

Tkac: It could be the credit box that you showed.

Dill: Exactly.

Tkac: Exactly. So, the next question I want to get to has to do with thinking about the local market. There's been a lot of talk—at least you'll hear it in the press—about urbanization, especially younger folks wanting to move inside cities and move to multi-family [housing], maybe buy condos, rent I'm just wondering whether or not you've seen in any of the data, any actual analytics around whether or not this is something we hear a lot about, or whether it's actually happening, or whether we can tell yet.

Dill: That's a great question. With my colleague, Elora Raymond, we looked at this issue. We have a blog post on it, in case you are looking for more detailed information on it, I'd recommend taking a look at our blog. But basically, we confirmed that to a certain extent, younger first-time buyers do tend to live closer in town to the city center than their older peers. We did a comparison, not only of younger first-time buyers to older first-time buyers, but we also looked at first-time buyers compared to people that already own their home. In general, we are detecting a slight shift to where everyone wants to live a little bit closer in, but when we measure the distance, the younger first-time buyers do tend to live a little bit closer to the city center than their older counterparts. So there's definitely some truth to that statement.

To be sure, there are young people that also want to live in the suburbs, so it's not to say that that doesn't happen, but with buying, they are tending to buy closer in. And when you think about renting, a lot of the development that's happening with multifamily buildings is happening in town. So, as we create new households, which we are creating new households, after seeing low levels of household formation for a while, there's been a pickup lately in the past year; and so with new households being formed, if their balance sheets aren't quite ready to buy, they will probably rent. And where's the new stock being added? Well, it's being added oftentimes in city centers, or closer in to the urban core.

Tkac: So it is real.

Dill: It's real! I think it's real. Based on our analysis, it's a real thing.

Tkac: OK, so one of your last slides talked about the credit box, and so one of the folks here with us online wanted you to elaborate a little bit more on how mortgage rules and regulations might impact, I suppose, home buying generally, but maybe in particular, if you have any information about first-time home buyers and the impact of the new regulations on that market specifically.

Dill: Yeah, it's interesting. There's been some policy changes over the past few years that have actually helped to maybe open the credit box. So, before the downturn, the 3 percent down payment was available, and then during the downturn, they took that away and thought that there needed to be more skin in the game. The average down payment increased to about 10 percent. Lately, the GSEs have reintroduced policies where lower down payments are available, especially for first-time home buyers. And so, there's also been moves to lower GFEs to make it a little more affordable to get these mortgages. I think that there have been policy changes that may help to open the credit box, but I still think that at the end of the day that things like FICO score, loan-to-value and debt-to-income are still really important, and there's not necessarily special rules for that segment of the population. So that credit box, while it may have opened up a little bit since 2014, we're going to refresh the state of it. I'm guessing it's going to look pretty similar.

Tkac: Parlaying from that into sort of a policy question....suppose, based on your analysis, it doesn't necessarily appear that a lack of first-time buyers is a source of weakness in the housing market, but for other reasons, there may be a desire to have policy impact on the number of first-time home buyers and their activity. So, one way to do that could be tax credits and others sorts of financial incentives that legislators could put in place. So, my question is, was the tax credit program you pointed to earlier effective?

Dill: So, I guess the answer is yes, depending on your vantage point. Clearly, across all of the series, across all of the first-time home buyer measures that were around during the tax credit period, you do see an increase in first-time buying; so, did it cause people to buy homes at a greater rate than they would have [otherwise]? Maybe, but you always wonder again, is it goosing demand, is it pulling forward buyers that may have wanted to purchase a year or two later? And so then, did it have the effect of depressing demand afterwards? Probably so. And so, was it effective? I guess if you wanted to get those sales in during those years, then sure.

Tkac: So one last quick question, and that is, to combine a few questions from audience members—what's the role here of the supply of housing that would be affordable for first-time home buyers? So, in some sense, thinking about the distribution of housing that's available and where that entry point is for a first-time home buyer, how does that play into this discussion of whether or not first-time home buyers are buying homes at the same pace and whether they are as active as they used to be?

Dill: I think that's a great question. Based on what we know about the stock that's out there, there may be a mismatch of what's available and what people are looking for. There's been a lot of talk. When we talk to builders they say the first-time buyer, the entry level buyer, is actually buying a little bit later and they are buying a higher-end house, a more expensive home. Some might say maybe that's because you are not building at the price point that they want and they would say well, maybe there's not demand. There's a give and take on why we have what we have in terms of supply. I think in terms of new housing stock, there's not a lot being built. There are a few brands that have special entry level, but there's not a lot of supply coming on line at those price points. Condos are often thought of as an alternative when you think about existing supply, but there are rules and regulations out there that govern if you're looking to get an FHA loan, and you want to live in a condo building, if it's owned by more than 30 percent investor—if there's dynamics going on in your market, say with Miami, where there's a lot of foreign buyers and investors kind of investing, that may prevent you from buying a home that is technically affordable at your price point but you may not be able to get in to, so there are definitely issues going on with supply.

Tkac: Well thank you, Jessica. That ends today's webcast. We look forward to seeing you at our next ECONversations in May, where we'll discuss the aging of the U.S. population. In the meantime, much, much more economic information is always available on the Atlanta Fed's website. Thank you for joining us today.