Released in July 2014, FHFA Brief 14-02, '"First Time Homebuyer Share and House Price Growth", arrives at a statistically supported conclusion that is at the very least predictable, if not painfully obvious.
"The tendency of the first-time homebuyer share to decline as house price growth increases, as measured by the negative correlation between the change in first-time homebuyer share and house price growth, is evident in the aggregate correlation nationwide, as well as in the correlations across most states and in most years between 1996 and 2013. This provides evidence for the second hypothesis that increasing house prices may price some would-be first-time homebuyers out of the market."
In other words, when housing price growth goes up, the rate of first-time buyer homeownership goes down.
While perhaps useful in an academic sense, this conclusion does not likely strike the average aspiring homebuyer, or anyone else as "breaking news". A more helpful set of observations might go so far as to ask (and answer) the more thought-provoking question, "In a market where credit is tightening and homeownership is declining, what are the primary causes for a steady increase in home prices?" Here's our take - and it's not as simple and straightforward as the time-honored relationship between supply and demand.
U.S. First-Time Homebuyers Sidelined by Hopelessly Restrictive Underwriting Standards
The prospective first-time homebuyer of today faces an almost hopeless array of restrictive underwriting standards resulting in a 'Culture of No'. Potential first-time homebuyers once deemed a safe bet given their history of fiscal responsibility and income stability are quickly becoming the newly rejected mortgage applicant of 2014. Beset by the rising prices, the Culture of No, and other contributing factors such as stagnant wages and overwhelming student loan debt, many potential first time homebuyers are losing faith in the prospect of homeownership altogether - not because it is altogether unattractive, rather it seems unattainable. An August 2014 Goldman Sachs equity research report, "Housing - The Millenials Edition", tells us that a resounding 90 percent of Millenial renters plan to own a home someday. Yes -- 90 percent. However, an April 2014 survey conducted by the MacArthur Foundation tells us that 59 percent of respondents throughout the country have experienced difficulty in finding affordable quality housing options to buy. It should also be noted that 58 percent of respondents in the same survey experienced difficulty in finding affordable quality rental housing as well. Extraneous shocks to home prices within a particular locale almost certainly contribute to artificial spikes in rental prices, making both options equally unaffordable.
U.S. First-Time Homebuyers Saddled With Skyrocketing GSE Loan Guarantee Fees and Related Costs
Fannie Mae and Freddie Mac loan guarantee fees have more than doubled in slightly more than two years, resulting in literally hundreds of dollars of additional cost to the borrower -- all within the context of a fully-operational 'ability to repay' mandate within the Qualified Mortgage rule, and an improving credit marketplace as measured by the average credit score of those loans recently bought by the two GSE giants. The FHFA is currently accepting public comment on the potential impact of yet another series of Fannie Mae and Freddie Mac loan guarantee hikes even as this commentary is being written. Additionally, new FHFA guidelines have been proposed adding more regulation and higher costs to private mortgage insurance helpful in guaranteeing higher loan-to-value mortgages while protecting the American taxpayer by sharing risk with the private sector. For the record, the average credit score of a Fannie Mae purchased single family loan in first quarter 2014 is 741 - significantly higher than the US median credit score of 723, and the national average of 711. If there is indeed a logically justifiable rationale for the doubling of GSE loan guarantee fees in the months since late 2012, higher Fannie Mae and Freddie Mac portfolio risk as measured by average credit score of the loans purchased does not qualify as one. Remember, Fannie Mae and Freddie Mac already routinely add a risk premium into the cost of the loans they purchase through the use of Loan Level Price Adjustors (LLPAs) -- essentially a system of surcharges added to loans with lower credit scores and/or higher debt-to-income ratios.
There must be more to the story.
It should be noted that both Fannie Mae and Freddie Mac presently operate in the 72nd month of federal conservatorship administered by, you guessed it, the Federal Housing Finance Agency (FHFA).
U.S. First-Time Homebuyers Overwhelmed and Outmaneuvered by Institutional Investors
The U.S. residential housing marketplace is seeing unprecedented levels of institutional investor activity in direct competition with the lowly first-time homebuyer for many of the same single-family properties. When confronted with a sizable institutional investor bid, one able to purchase properties in bulk, with cash in hand, it's hard to imagine a scenario where the ordinary first-time homebuyer stands a fighting chance, no matter how pristine their credit history, how stable their income, or how low their debt-to-income ratio. Even as the pace of institutional home purchases slows from the torrid pace of 2012 and 2013, all-cash purchases still account for 42.7 percent of U.S. residential property sales in the first quarter of 2014, with institutional purchases accounting for a large slice of the pie in those areas hit hardest by the foreclosure crisis, including Atlanta, Las Vegas, Miami and Phoenix.
While there are admittedly deeper and more complex considerations also contributing to this persistent dilemma, these general observations cannot be refuted on their merits, and their existence does not help to remedy the problem. In fact, these are the primary factors that make the state of our residential housing marketplace worse. They represent but a narrow representation of the dizzying array of unfavorable conditions that our policies at the national level must serve to alleviate. A policymaking environment that unintentionally, yet unduly punishes working class, middle class, Millenial, minority, and first-time homebuyers while inviting institutions to become majority homeowners within certain neighborhoods and cities is one that is headed in the wrong direction.
For these, and other underrepresented groups, policies like those mentioned above amount to a systemic, if unintentional process shifting the engine of wealth generation from the underserved to the uber-wealthy.
Yes, FHFA Brief 14-02 is helpful in that it provides an empirical foundation to the sort of thinking that most reasonably-informed Americans would already venture to guess: As home prices go up, the ability of prospective first-time buyers to afford them goes down. No disagreement there. The fact that a taxpayer funded study was deemed necessary to demonstrate as much seems a bit wasteful unto itself.
What America's Homeowner Alliance asks on the behalf of the more than 17 million new U.S. households demographically projected to join our ranks over the next 15 years -- 13 million of which will likely be minority households, is exactly what if anything is Washington prepared to do to protect and promote sustainable homeownership in America?