A new study from the American Enterprise Institute (AEI) claims the share of mortgages going to first-time home buyers are much higher than previous estimations.
Stephen Oliner and Edward Pinto, codirectors of AEI’s International Center on Housing Risk, announced the inaugural release of the First-Time Buyer Mortgage Share Index (FBMSI), a new objective that measures the share of mortgages going to first-time buyers. They also announced an index to measure the risk of those loans, the First-Time Buyer Mortgage Risk Index (FBMRI).
The Agency FBMSI (which measures mortgages guaranteed by government agencies) averaged 52% over the 12 months ending October 2014. The Combined FBMSI (which includes both government-guaranteed and private-sector mortgages) averaged an estimated 46% over the 12 months ending October 2014.
“Discussions about homeownership and credit availability are hampered when not grounded in good measurements of loan availability and risk,” said Pinto. “We developed these new tools to provide accurate information to help inform the conversation.”
The FBMSI is the first time the national first-time buyer share has been calculated using a nearly complete dataset with minimal opportunity for sample error, according to AEI. The index is in contrast to the 2014 survey conducted by the National Association of Realtors (NAR), which was based on responses constituting only 0.2% of all purchase loans originated during the 12-month survey period and was voluntary, with responses received from only 9% of those mailed the 127-question survey.
"For the July 2013-June 2014 period covered by the NAR’s survey, the center’s Combined FBMSI had an average value of 45%, substantially higher than the NAR’s survey finding that first-time homebuyers constituted 36% of purchase loans used to buy a primary residence," AEI stated.
“It is not surprising that the NAR results, which are based on a small and non-random sample, provide an inaccurate picture of the importance of first-time home buyers,” said Oliner. “The FBMSI is as comprehensive as currently possible and will hopefully allow a discussion of the facts on this important issue.”
AEI’s First-Time Buyer Mortgage Risk Index (FBMRI) stood at 14.56% in October, up slightly from the average for the prior three months, but up nearly 1 percentage point from a year earlier. The FBMRI is about 3 percentage points higher than the composite National Mortgage Risk Index (NMRI) and about 6 percentage points higher than the repeat home buyer NMRI.
The higher risk for the mortgages taken out by first-time buyers is largely due to risk layering. In October 2014, two-thirds of first-time buyer mortgages had a combined loan-to-value ratio of 95% or higher, and 96% had a 30-year term. "Facing the combination of little money down and slow amortization, these buyers will have very little home equity for a number of years unless their house appreciates substantially," according to AEI.
In addition, about one-fifth of first-time buyers taking out mortgages had a FICO score below 660, the traditional definition of subprime mortgages.
The FBMSI and FBMRI measures of the first-time buyer share and the riskiness of first-time buyer mortgages, respectively, based on the millions of loans included in National Mortgage Risk Index (NMRI) database developed by AEI’s International Center on Housing Risk. For more information about the FBMSI, FBMRI, and NMRI, please visit HousingRisk.org.
AEI’s International Center on Housing Risk said it will update the FBMSI monthly.
Click here to view the FBMSI data.