To bring more first-time buyers into the housing market, Fannie Mae and Freddie Mac recently said they would offer certain mortgage programs that require down payments of as little as 3 percent, down from 5 percent. Because first-time buyers already make up a large share of the housing market, the wisdom of this policy change should be open to question.
As the chart below shows, the average market share of first-time buyers has slipped from the 2009 high of 60 percent to 54 percent in 2013, the last year with data available. The surge was partly a result of a vast expansion of federal programs to attract first-time buyers in a bid to prop up the collapsing housing market. The combination of record-low mortgage rates and plunging prices also led many first-time buyers to come out of the woodwork. Note that during the mid-2000 boom years, first-time buyers often made up less than 40 percent of the market.
Some now argue that rising housing prices, coupled with a shortage of first-time buyers, are responsible for the slowing housing recovery.
Yet I have to wonder if that’s really the problem, since Fannie and Freddie’s own data show that in 2013 first-time buyers still made up a majority of the housing market.
Here’s what I think is going on. The burst of sales activity during the past couple of years was caused by a release of pent-up demand. That demand has largely now been satisfied.
If the size of a down payment wasn’t behind the recent slowdown in sales, why should anyone expect the market to rebound from a reduction in the amount a buyer has to put down? The answer is, they shouldn’t. More to the point, this new policy seems misguided and sends the wrong message given the housing boom-and-bust nightmare we’re still climbing out of. As a nation, we should focus on the real problems in the housing market and drop the notion of a quick fix that may well have unintended consequences. Anemic wage growth and tight mortgage-lending standards are the main things holding back the market, not the lack of first-time buyers.
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