Why first-time homebuyers will make a comeback in 2015

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Jonathan Smoke

Unemployment among mid-20 and 30-somethings — who make up the bulk of first-time buyers — has fallen considerably, positioning them to finally buy that starter home.

During the frustratingly slow recovery of America’s housing market, it’s no secret that first-time homebuyers in their mid 20s to 30s have missed out. Mortgage rates have been ultra low, but since the housing market crashed in 2007, young people today haven’t purchased as many homes as previous generations.

That will likely change this year, however. As the National Association of Realtors on Monday releases its report on new home sales, it’s a good time to look ahead at the prospects of young homebuyers. In 2014, most factors that held them back started improving dramatically: after reaching a high of 10.6%, the unemployment rate for 25 to 34-year-olds — who make up the majority of first-time buyers — has fallen to 5.9%. That’s higher than the overall unemployment rate of 5.6%, but young buyers will benefit from key markets.

Since affordability and coming up with a down payment are often challenges for first-time buyers, markets with the lowest home prices relative to local incomes could present the greatest opportunities for growth. Top of the largest 100 markets in the country is Detroit, and the market already ranks 7th in the number of homes owned by millennials, according to data from Realtor.com.

Other markets with large numbers of millennials and where homes are relatively more affordable include Chicago, Dallas, Atlanta and Philadelphia. These markets are among the top 10 markets most widely searched on Realtor.com in January.

What’s more, lending standards for home mortgages have loosened, while down payments for conventional mortgages have fallen. Mortgage insurance premiums have also fallen, which can amount to as much as 5% of income in some parts of the country. Lower insurance fees will help more households fall within qualification ratios on lower down payment loans.

With these factors on their side, I expect millennials to represent more than two-thirds of all new households over the next decade. And 25 to 34-year-olds, in particular, will drive as much as half of all new home sales this year.

The share of first-time buyers has been stuck near 30% when it has historically been 40% to 50%. Part of what is needed to support that growth is already happening — namely, improvements in access to mortgage credit and new affordable low down payment alternatives. The rest is on the back of the older cohort of millennials, and the evidence suggests they will not disappoint.

Millennials are the largest generation so far, and they impact America’s housing market in big ways. For instance,approximately 3% of 25 to 34-year-olds were able to purchase a home in 2014, compared with 5% in 1980. With the larger number of 25 to 34-year-olds today, a 5% purchase rate last year would have increased home sales by more than 15%, and would have represented a share of 40% of all home sales.

That increase would get the U.S. back to normal levels of home sales in both existing and new home sales. I am not expecting to see the market get all the way there in 2015, but we should see substantial progress this year where America’s millennials would be driving the recovery.

Jonathan Smoke is chief economist at Realtor.com.