First-time buyer (FTBs) volume jumped another 3 percent in August 2017, as compared to August 2016, according to the latest data from the American Enterprise Institute’s International Center on Housing Risk. First-time buyer volume has increased 42 percent since August 2013. As volume increases, so has FTB risk, which has increased by 3 ppts, according to AEI’s FTB National Mortgage Risk Index (FBMRI). According to the update, “too much demand, enabled by increasing leverage, is chasing a limited supply, all of which is driving up house prices.”
The FBMRI for Agency purchase loans hit 16.3 percent for August 2017, 6.9 ppts. higher than the MRI for repeat buyers. FHA’s First-Time Buyer NMRI reached 26.5 percent in August 2017, up 1.6 ppts. from the year prior and 2.4 ppts from two years earlier. The update points out that two years ago placed it before FHA’s mortgage insurance premium cut.
Edward Pinto, codirector of AEI’s International Center on Housing Risk, said, “The home price boom that started in mid-2012 is accelerating, with year-over-year increases now running at 6-7 percent.” Pinto said that the soaring and price of entry-level homes is driving more FTBs into taking on greater levels of risk.
The FBMRI update also revealed that the median FTB puts down only $5,300, or 3.0 percent.
Tobias Peter, senior research analyst of AEI’s International Center on Housing Risk, says that an even wider credit box is not the answer. “This has been tried—and it failed,” Peter said. “For the last four years, more first-time buyer leverage in a seller’s market has gotten capitalized into higher house prices, thus crimping affordability.” So what’s the solution? Adding more supply, he says. “Especially at the lower end of the housing market,” Peter said, “where most first-time buyers are buying.”
Here’s how AEI explains the National Mortgage Risk Index:
The National Mortgage Risk Index (NMRI) measures how government-guaranteed loans with an origination date in a given month would perform if subjected to the same stress as in the financial crisis that began in 2007. This is similar to stress tests routinely performed to ascertain an automobile’s crashworthiness or a building’s ability to withstand severe hurricane force winds. An NMRI value of 10%, for example, for a given set of loans indicates that 10% of those loans would be expected to default in a severe stress event, based on the actual performance of loans with the same risk characteristics after the financial crisis.