BAM Key Details:
- Zillow has released its 2023 Consumer Housing Trends Report showing that 50% of those purchasing homes in 2023 are first-time home buyers. That’s the highest share recorded by Zillow and up from 45% in 2022 and 37% in 2021.
- Affordability remains the biggest hurdle for buyers as monthly payments have more than doubled since early 2022 and higher costs make it more difficult to save for a down payment.
A full 50% of those purchasing homes in 2023 are first-time home buyers—up from 45% last year and from 37% in 2021.
That’s according to the Zillow 2023 Consumer Housing Trends Report. That 50% is the highest share of first-time buyers ever recorded by Zillow. First-time buyers are catching up to repeat buyers, mainly because a majority of the latter are locked into rates below 5%.
The lock-in effect from those lower rates has made these homeowners about half as likely to move. Result: fewer repeat buyers.
It’s true the number of transactions has gone down this year, so first-time home buyers make up a larger slice of a smaller pie. Higher mortgage rates and a severe inventory shortage have both contributed to the drop in sales.
But the increased share of first-time buyers at least sheds some light on the demand that’s still propping up home prices at a time when mortgage rates are hovering between 7% and 8%.
High mortgage rates and a shortage of inventory is keeping would-be repeat buyers in their current homes. A greater relative share of first-time buyers is filling the gap, and they’re competing against each other for the limited number of affordable starter homes on the market.
That demand is also an encouraging sign for builders across the country.
Affordability is still the #1 challenge for first-time buyers
The biggest obstacle between many potential home buyers and their first home purchase is the lack of affordability. According to Zillow research, it now takes an average of almost 12 years for a typical first-time home buyer to save enough for a competitive down payment.
Before the pandemic, in July 2019, it took about nine years.
Source: Zillow Research
During the same time period, the typical monthly mortgage payment has more than doubled. The price point for a home that carries a $2,500 monthly payment has fallen from $758,572 to $443,451.
Source: Bloomberg
The main reason for the higher monthly costs is the current mortgage rate, which, at the time of this writing, was roughly halfway between 7% and 8%. It hasn’t dipped below 7% since July 26th, according to Mortgage News Daily. The higher it gets, the lower the affordable price point.
In spite of that, the share of first-time home buyers is still growing as more of them take advantage of one or more of the following:
- Down payment assistance programs
- Co-ownership with a spouse/partner, relative, or friend
- Buying mortgage points to reduce their rate
- Concessions offered by builders for newly-built homes
- Tapping into multiple sources to finance the down payment (savings + gifts, etc.)
Zillow’s new app filter that allows home shoppers to search by monthly payment amount also helps new buyers focus on homes they can realistically afford, given the resources available to them.
Also, nearly 45% of conventional primary home buyers purchased mortgage points to reduce their rate and thereby lower their monthly costs. Compare that to 30% who took advantage of this option in 2021.
Finally, Zillow research shows about half of all mortgage borrowers make a down payment of less than 20% of the home’s final purchase price.
Nearly half of first-time buyers are millennials
Millennials (29-43 yrs) make up almost half (49%) of first-time buyers in 2023. Gen Z (18-28 yrs) accounts for the next largest share at 27%.
Granted, older generations are more likely to be repeat buyers, simply because they’ve been around longer. Looking at the larger pie of total home buyers, millennials still take the largest share at 37%, followed by Gen X at 23%, Boomers at 21%, Gen Z at 17%, and the Silent Generation at 3%.
Agents and lenders
First-time buyers are also more likely than repeat buyers to contact at least three real estate agents and three mortgage lenders. Repeat buyers are more likely to already know an agent and a lender they trust to help them with their next transaction.
Compare that to the typical buyer (first-time or repeat) who contacts two mortgage lenders before choosing one.
Also, 40% of first-time buyers hired the first real estate agent they contacted, compared to 54% of repeat buyers.
Multiple offers and mortgage denials
Zillow research shows first-time buyers are more likely than repeat buyers to make at least two offers on homes. They’re also more likely to be denied a mortgage at least once before finally being approved.
Undeterred by these denials, many first-time buyers simply re-assess, make some adjustments, and re-apply. And their persistence has paid off. On the whole, these buyers still see the benefits of homeownership as well worth today’s higher cost of admission.
Strong first-time buyer demand also suggests relative optimism regarding the overall economy, job security, and household income.
Read the full report on Zillow for more details.
Takeaways for real estate agents
First-time home buyers who can still afford to purchase a home at today’s rates can at least be reasonably certain that their monthly payment will become more affordable as their household income grows.
They can also expect that the value of their home will grow about 40% over the next ten years.
So, while sidelined buyers waiting for affordability to improve will face stiffer competition for available homes when rates do go down, those who can afford to buy now may be better off doing just that. This is where you as the knowledge broker come in to assess their situation and help them decide what would serve them best.
How many conversations like this are you having right now? And how many are you prepared to have?
