First-time homebuyers are coming back on the market, despite higher home prices and soaring interest rates. 

That’s one big takeaway from Zillow’s 2022 Consumer Housing Trends Report. 

During the pandemic buying frenzy, the share of first-time home buyers dropped to 37%.  But recent affordability challenges have disproportionately affected repeat homebuyers while giving first-timers a chance to boost their numbers. 

And given the three advantages described here, it’s no wonder they’re doing just that. 

#1 – First-time homebuyers don’t have lower rates locked in

True, a repeat homebuyer has the advantage of cashing out the equity in their current home to put toward a new home. But those with lower rates locked in have to weigh the cost of upgrading when current rates would add $100s to their monthly mortgage payments. 

They’re already building equity, whether they stay put with the lower monthly payment on their current home or move to a more desirable one. 

Meanwhile, first-time home buyers are comparing the cost of homebuying—higher rates and all—with the cost of continuing to rent. 

And with rents steadily climbing, homeownership looks like a better deal for many. 

First-time buyers now appear to be making relative gains as high mortgage interest rates disproportionately encourage current homeowners to stay put. The flow of homes into the market is slowing, suggesting homeowners are likely comparing their current low mortgage rate to today’s rates and deciding not to move. While rising mortgage rates are hurting affordability for all buyers, first-time buyers may be less deterred by higher rates because they’re comparing a monthly mortgage payment to what they’re paying in rent.

Manny Garcia

Zillow population scientist

#2 – First-time homebuyers can get FHA loans

Another advantage for first-timers is the option of getting an FHA loan rather than a conventional loan, which typically comes with a higher rate and a larger down payment. 

Here are the key differences between FHA and conventional loans:

  • Down payments: 3.5%+ for FHA loans — compared to 5.0%+ for a conventional loan
  • Credit score: 580+ — compared to 620+ for a conventional loan
  • Lower interest rates for FHA loans

#3 – First-time buyers don’t have to sell their current home

The only transaction first-timers have to worry about is purchasing their first home. They don’t have to time the purchase of a new home with the sale of their current one. 

With houses staying on the market an extra week or more before the seller hears of any offers, this is one hassle the first-time homebuyer doesn’t have to worry about. 

On the other hand, we may see more homeowners go the iBuying route, hoping for a quick sale so they can focus on buying their next home.  

A larger share of a smaller pie

The homebuyer “pie” is smaller than it was a year ago. But with more repeat buyers backing away from the housing market, first-time buyers have more opportunity—and more incentive—to step back in. 

That said, potential buyers who qualify for a mortgage (conventional or FHA) are still faced with the following challenges: 

  • Home values are 14.1% higher than last year, even after two month-over-month declines.
  • Based on current interest rates, monthly payments are nearly 60% higher than a year ago.
  • Buyers fear a decline in home values will leave them underwater with their home equity.

Fannie Mae’s October housing forecast does project negative growth for home prices in 2023—to the tune of -1.5% by the fourth quarter. 

Also, according to Zillow’s research, the higher cost of homeownership has ramped up demand for the lowest-priced homes on the market. So, even with fewer homebuyers overall, first-timers face stiffer competition for starter homes. 

Top takeaways for real estate agents

Ultimately, a consumer’s decision to buy a home rests more on personal goals and needs than mortgage rates or home price fluctuations. 

Look for ways to level up your service to clients who are first-time homebuyers:

  • Collect and provide information about FHA loans and other loan options
  • Provide information on tools and resources that help your client save money
  • Create a report comparing the costs of homeownership to renting

Customize that last one with details provided by your client for their current rental as well as the costs involved in the home they’d like to purchase. 

Help them see exactly what they would be paying each month in either scenario so they can make the best decision, even if that means holding off until they’re in a better financial position. 

They’ll remember the agent who helped them see the way forward more clearly.