New information from realtor.com, the official site of the National Association of Realtors, suggests that the share of first-time buyers planning to buy a home in spring 2017 fell sharply when mortgage rates began to rise at the end of last year, dropping by as much as 10 percent since last October. At the same time, record low inventory levels, higher prices and heavy buyer competition are 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."
An October 2016 realtor.com survey of active home buyers found 55 percent of those planning to buy a home in the spring were first-time home buyers. That percentage dropped significantly according to a follow-up survey in January 2017, which found 44 percent of those planning a spring 2017 home purchase were first-time home buyers.
The average 30-year conforming rate rose to more than 4.2 percent by the end of December 2016 from 3.4 percent 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 percent down would cost an additional $720 per year in added interest. That equals more than 1 percent of the median household's income.
According to the realtor.com survey, 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."
Meanwhile, rising interest rates appear to have the opposite response on repeat home buyers. The current increases in interest rates have actually spurred demand from experienced buyers, as evidenced by increased realtor.com listings views and decreased inventory.
Denise Welsh, president of Silicon Valley Association of Realtors, said even with the current increases interest rates remain historically low, but first-time home buyers are more challenged than more experienced buyers. "Most first-time home buyers are dependent on financing and an additional $700 a year in added interest can make a difference in their qualifying ratios," explained Welsh. "On the other hand, repeat buyers, those who want to move up and have realized the benefits from homeownership, know there will likely be additional increases in rates in the near future. They most likely have equity in their homes and would be more active buyers."
Welsh anticipates with limited inventory, prices are likely to remain at record highs, especially in the San Francisco Bay Area. "If anything, concern for the rising interest rates will make demand more intense," said Welsh.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
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