At a moment when overall home sales are slowing, the first-time homebuyers market is hot. First-timer demand in the third quarter hit its highest level since the same quarter of 2000, Genworth Mortgage Insurance reported Tuesday.

First-timers bought 601,000 single-family homes during the July-to-September period, compared with 567,000 during the third quarter of 2016, an increase of 6%.

These homebuyers accounted for 40% of all single-family homes sold and 56% of all purchase mortgages financed.

According to Tian Liu, chief economist at Genworth Mortgage Insurance, first-time homebuyers buoyed the broader housing market, which contracted 1% from a year earlier.

“The surge in first-time homebuyer demand, and the decline in overall purchases, was driven by supply-demand imbalances in today’s housing market,” Liu said in a statement.  

Genworth’s third-quarter report drew on a data set of 21 million first-time homebuyers over a 24-year period.

The report said repeat homebuyer demand declined for the first time since 2011. This group purchased 5% fewer homes during the third quarter than a year ago.

The main reason, Liu said, was that supply shortages were making homes less affordable, reducing incentives to existing homeowners who want to upgrade. “It shows that the housing market is not working for all homebuyers,” he said.

As supply shortages continue to inflate home pricing, first-time buyer demand continues to increase because of a greater sense of urgency from rental and home price inflation, and greater housing need due to family formation. “First-time homebuyers see more value in homeownership beyond a simple financial return on their investment,” Liu said.

Mortgage Industry Shift

An increased supply of low down-payment mortgage products — for loans in which buyers put down 20% or less of the purchase price — has facilitated first-time homebuyers’ entry into the purchase market, with demand reaching its highest level since the third quarter of 1999. (Such loans typically require private mortgage insurance.)

Seventy-eight percent of first-time homebuyers used a low down-payment product during the third quarter, financing 467,000 sales, a 5% year-over-year increase.

Liu said first-time homebuyer growth was shifting the mortgage industry landscape in favor of the private sector. The private mortgage insurance industry insured 181,000 loans to first-time homebuyers during the third quarter, up 19% from a year ago and its highest level since the second quarter of 2007.

In contrast, the FHA program is beginning to contract. FHA loans fell by 6% from a year ago to 197,000 loans for the quarter.

“These trends suggest that the private mortgage insurance industry will likely become the largest source of credit enhancement for the first-time homebuyer market soon, taking over from the FHA,” Liu said. 

The large influx of first-time homebuyers is creating a unique challenge in the housing market, according to Liu. These buyers do not have a home to sell — a big reason why housing inventory has been declining, while sales and price growth have been rising.

Moreover, the rising demand from potential first-time homebuyers has not been met by a big increase in homes priced below $250,000, a price point chosen by many first-timers, according to Liu. The demand for affordable homes is increasing by hundreds of thousands of units a year, but the mix of those in the preferred price segment is down compared with 2011.

This demand-supply disconnect means that home price gains will continue. Liu said that while many forecasters were predicting a slower pace of home price growth, Genworth considers that unlikely in 2018. “In fact, our expectation that the conforming loan limit would rise to around $450,000 in 2018 was already fulfilled even before the release of this report,” he said.

“In addition to rising home prices, we also expect some potential homebuyers facing less urgency in making a buying decision to stay on the sidelines or pursue other options such as hiring contractors to upgrade.”

— Check out Top 10 Cities for Millennial Homebuyers on ThinkAdvisor.