First-Time Home Buyers Record Low Flags Risk of US Housing Market Bubble

The proportion of first-time buyers as a percentage of total US housing market buyers has been lower than the historical average over the past few years, and it keeps dropping.

Meanwhile, the proportion of real estate investors is rising. What does this mean for the market, and could it be a warning signal that a housing market crash is coming?

Decline of First-Time US Housing Market buyers

Historically, first-time buyers have made up around 40% of the total home sales market in the US. But in April 2022, they accounted for just 28% of existing-home sales. 

This isn’t an overnight change, but the problem is getting worse. Between 2003 and 2010, the proportion of first-time buyers consistently hovered around 40%, although the number went as high as 50% in 2010.

Yet the percentage dropped to 33% in 2014, and has been around that level since — now, the share has dropped lower than ever.

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You might wonder if this is partly due to a decline in interest in buying homes among younger age groups rather than an inability to do so, yet surveys suggest most younger people do want to become homeowners.

However, they’re held back by a number of factors; above all, high rents and requirements for high deposits.

This has become even worse in the recent competitive market, where existing homeowners have an advantage and many can buy in cash. There’s also the factor of investors influencing the market, which we’ll get to shortly.

However, even if many people want to buy a house, the belief that now isn’t the right time to do so could be influencing the figures.

A survey by Fannie Mae of 1,006 Americans found that 70% of respondents thought it was a bad time to buy a house, while only 25% thought it was a good time.

The Rise of Real Estate Investors

While the share of first-time buyers is lower than ever, investors are starting to play an increasingly important role. In April 2022, investors made up 17% of the sales of existing properties.

Some areas face even higher rates than this; Charlotte leads the way with a share of 32.1%, shortly followed by Jacksonville with a share of 29.8%. 

Another study by real estate broker Redfin focused on the fourth quarter of 2021 found real estate investors bought a record number of 18.4% of all US properties — up from 12.6% in 2020.

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This was slightly lower than the third quarter of the year due to seasonal trends for buying houses, but way above previous results for the same quarter.

The increased demand for rental houses and the high prices landlords can get for renting is encouraging investors to get involved in the market right now — rent prices are up 11.3% over the last year.

Plus, the general housing shortage is pushing prices up further since lots of people who would like to can’t afford to buy are forced to rent, contributing to higher rental prices.

What it Means

There may be increased numbers of investors and decreased numbers of first-time buyers in the home sales market right now, but does this mean anything? And more specifically, does it mean a housing crash could be brewing?

Even if part of the reason first-time buyers are putting off purchasing a home is their belief it’s not a great time to buy, this could become a self-fulfilling prophecy.

Over time, demand could get too low for the market to sustain itself, meaning house prices could stabilize or even decline. 

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We may even be seeing the results of some of these trends already. While median house prices remain high, they’re skewed by the higher end of the market, which is likely to be most influenced by investors rather than first-time buyers.

While homes with prices between $100,000 and $250,000 fell by 29% between 2021 and 2022, those with prices between $500,000 and $750,000 increased by 19% over the same period. This suggests house prices are already falling in certain markets.

But on the other hand, if the people who aren’t buying houses continue to rent, it encourages investors to get involved in the market by becoming landlords.

In this case, we wouldn’t be on the verge of a crash but simply a rearrangement in how the housing market works (aka more renting and real estate investors acting as landlords).

Other Factors

Regardless of the impact the proportion of first-time buyers and investors could have on the housing market, they aren’t the only factors to consider.

There are other influential aspects, such as the level of housing supply, how quickly prices are rising and the levels they’re rising to (and whether they’re sustainable), and interest rate increases, which make mortgages less affordable.

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Overall, these factors don’t add up to suggest a housing crash. The property market remains tight with fairly limited supply, and interest rates remain affordable when put into historical context.

Although house prices are rising, real estate investors and the relative lack of housing supply will likely be enough to sustain them.

Therefore, most predict that house prices will continue to rise, albeit at a slower pace. For instance, a study by Reuters predicts house prices will rise by 10% over the next year. 

That Housing Market Crash Might Not Happen

Although the decreasing numbers of first-time buyers and the increasing number of investors spells bad news for anyone hoping to buy a house soon, it’s unlikely a crash is coming any time soon.

The low numbers of first-time buyers will still have to rent, incentivizing real estate investors to purchase properties — and the lack of supply to go around will keep prices high. However, there are plenty of opinions on the topic, so feel free to reach your own conclusion. 

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Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.

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Tim Thomas has investments in real estate.

This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.

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