First-time homebuyer activity a bright spot in subdued market

New buyers remain eager to purchase despite affordability woes, association suggests

First-time homebuyer activity a bright spot in subdued market

Mortgage applications for home purchases have jumped for the first time in five weeks – and an encouraging recent trend is seeing plenty of first-time homebuyers tap into the market, according to the Mortgage Bankers Association (MBA).

The group said its index of purchase applications were up by 8.6% in the week ending June 7, hitting their highest point since the beginning of May, with president and chief executive officer Bob Broeksmit noting last week the “resilient” performance of first-time buyers.

Purchase applications for FHA and VA loans, mostly utilized by new entrants to the market, have made up a significant share of recent applications, he said, with the association expecting demand from that market segment to strengthen when rates eventually tick lower later in the year.

Speaking with Mortgage Professional America, MBA’s vice president and deputy chief economist Joel Kan (pictured top) said the first-time homebuyer cohort was accounting for “pretty strong” demand across the US mortgage market.

Demographics are playing a big role in driving that trend, he said, with a sizable portion of the US population now entering the age range usually associated with first-time homeownership.

“Not everyone can afford to own a home, but at the same time you get this increased likelihood of homeownership as the population ages,” he said. “So again, with such a big segment of the population in that range – whether it’s job-related changes or just the life stage, maybe starting a family – you do get to a point where you have this increase in homeownership.”

First-time homebuying on the up

An increase in the share of FHA mortgages being done specifically on the purchase side is also telling, Kan added, because more than 80% of those loan types tend to go to first-time homebuyers.

An uptick, then, is “pretty closely connected with more first-time homebuyer activity,” he said, especially as that buyer cohort is generally relying predominantly on savings and a downpayment to purchase.

Unsurprisingly, the age profile associated with first-time homebuyers also appears to be on the rise thanks to affordability issues across the country and the rising amounts needed to fund a downpayment.

“I think we’ve seen a shift in the profile in the sense that people are waiting a little bit longer. So the current first-time homebuyer might be a little bit older,” Kan said. “They might have dual incomes, just finding ways to get around some of these affordability challenges.”

What’s the outlook on interest rates?

Kan was speaking with MPA days before the Federal Reserve revealed its rate decision for June, which saw the central bank keep its key rate on hold once again – the seventh meeting in a row in which rates have rested in the 5.25% to 5.5% range.

While the latest jobs data remained stronger than the Fed might have hoped, inflation showed signs of moderating by ticking downwards in May.

The Fed indicated in the wake of Wednesday’s rate announcement that it now only expects one interest rate cut in 2024, although MBA’s senior vice president and chief economist Mike Fratantoni noted that its dot plot suggests a “close call” between one and two future cuts.

While the Fed’s projection for the terminal rate has also inched higher – and its cutting cycle is set to be shorter than others – Fratantoni said MBA’s forecast for mortgage rates remains unchanged, with a drop to 6.5% by the end of 2024 still likely.

A Fed cut would prove welcome news for the US’s housing and mortgage markets, which have felt the effect of the central bank’s series of rate hikes throughout 2022 and 2023 as part of its bid to dial down surging inflation.

Mortgage rates have also jumped during that period, having continued to hover around the 7% mark for a prolonged spell – a trend that’s seen many homebuyers step to the sidelines as they weigh up when the best time to make a move might be.

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