First-Time Homebuyers Proliferate: What Are the Consequences?

Via Calculated Risk blog, some examples of how dependent the market is on first- time home buyers and investors. Now that we have a new (and improved) tax credit of $6500 rolling through Congress to "move up" buyers, we'll see if government can incentivize that class to start daytrading homes as well. The only issue is so many of them are underwater on their homes, [Oct 9, 2008: WSJ - Nearly 1 in 6 Homes Underwater] [Mar 9, 2009: One in Five Houses Underwater], so it is sort of difficult to buy a new house (even with government handing free money out) when you still have to deal with that unfortunate investment you made in your old one. Unless, a new national fraud is institutionalized - that is (1) buy the new house with the taxpayer's money & "super cool FHA mortgages", and (2) then walk away from the old house / mortgage, once the new one is secured. You take a hit on your credit report but oh well - you have a new house, at a much cheaper price, and the taxpayer can deal with the mess. In about 5 years you are good to go as the default moves to the bottom of your credit report, and within 7 years.... all gone. Let's see if we start hearing of rampant examples of this "strategy" by next spring.

Here are snippets from three of the hardest hit markets - we won't rehash what the housing market would look like without $1 Trillion+ of national treasure wasted by the central bank to push mortgage rates down below reality, and billions spent to pull in first time home buyers from 2010 and 2011 into 2009.

While housing prices are now far more affordable then they were just a few years ago, and the median has reached the upper end of where I projected in 2007 (when almost all the cheerleaders pundits declared housing prices could not fall nationwide in America) [Dec 6, 2007: Analysis - What Should Median Housing Prices be Today?] , I am convinced the action of our leadership to keep prices elevated, will lead to yet another leg down. Certainly it won't be so frenetic as we've just seen, because 30-40% drops from here would have prices back to 1980s levels, but unless we're going to permanently have a $8000 tax credit (therefore simply pushing the prices of all homes $8000 higher than they should be) and mortgages rates will never again see the light of >6%, we're living in a new mirage.

Further, I expect a whole new supply of homes to come onto the market in about 3 years from new "buyers" using the FHA programs of "bad credit? No problem! Nothing down, to boot!" financing we've now institutionalized ... Subprime Nation lives on. [May 6, 2009: FHA - The Next Housing Bust] [May 8, 2009: Minyanville - Subprime Lending is Back with a Vengeance] [Aug 12, 2009: WSJ - The Next Fannie Mae - FHA/Ginnie Mae]

Again just try to imagine America with 6.25% thirty year mortgages and no federal handouts to buy homes. That could easily be the reality in about 30 months.
Via Calculated Risk

Las Vegas:

In September, a popular form of financing used by first-time home buyers – government-insured FHA loans – accounted for 53.8 percent of all home purchases, up from 52 percent in August. Absentee buyers bought 40.4 percent of all Las Vegas–area homes last month – the highest figure for any month this decade. Absentee buyers are often investors, but could include second-home buyers and others who, for various reasons, indicate at the time of sale that the property tax bill will be sent to a different address.

Think about that for a moment - "investors" (as a percentage of all purchases) account for more purchases in Vegas than at the height of the bubble. Combined, these 2 forms of purchase account for 94%of all purchases in the "recovering" Vegas market.

Miami:

A popular form of financing used by first-time home buyers - government-insured FHA loans - accounted for 45.0 percent of all September purchases, while absentee buyers bought 29.7 percent of all homes last month, according to an analysis of public property records.

Again in Miami, these 2 forms of purchase account for 75% of all purchases.

Phoenix:

First-time buyers and investors remained the market’s lifeblood. Last month 46.7 percent of all Phoenix-area buyers used government-insured FHA loans, a popular choice among first-time buyers, according to an analysis of public property records. Absentee buyers made up 38.5 percent of all purchases ...

Figures in Phoenix actually surpass Vegas! 95% of all purchases are due to these 2 type of buyers. The "move up" buyer is nowhere to be found.

As Calculated Risk concludes

We are far from a healthy market ...

Comments

[enigmaman:]

While I share your concerns as it relates to whom the Fed is motivating to buy homes and what the consequences may be some where down the road, while you rightly worry about the potential consequences of these action, the Fed is worried about what happens "today" and will worry about tomorrow well
" tomorrow" . They have basically given up on trying to help owners facing foreclosure (John Hussman offered up a great plan to help these) something they said was critical to stabilizing the real estate market and economy, instead they have now turned to promoting buying distressed foreclosed homes as a way to stop home price declines. Unfortunately unless the Fed does something substantial and right away to help create jobs, foreclosures will continue and increase with many of these new home buyers joining the ranks of their homes previous owners. The cure for all our ills is jobs, jobs, jobs sadly the admin appears to have thrown in the towel on this, cant see the trees for the forest, they have their agenda, they are sticking to it, facts and reality be damned, Cap and Trade, Health Care reform will save our economy, this is what he believes and this is what he has stated I guess we will find out wont we.

Nov 02 08:34 AM

[Loan Survivor:]

Which is worse - bailing out the Wall Street elite responsible for this mess in the first place or a housing market played like a fiddle by the elite?

My personal pick is the lesser of the two evils - the housing market and the corresponding taxpayers.

FYI - buying a new home and walking away from the old one is much tougher now that phantom rental income from the old home can't be used to qualify for a mortgage on the new one. FNMA/FHLMC & FHA have implemented minimum equity requirements in existing home to use rental income from it.

Nov 02 08:46 AM

[Smalltownba...:]

Investor purchase activity today is value driven as opposed to speculation driven. Most investor purchase activity that I see today is buy and hold (rental) as opposed to buy and flip which put us where we are. I think your concerns are unfounded. The high percentage of first time buyers is encouraging and leads to a recovery in the move up market. When the first time buyer purchases it allows the seller to move up. Problem so far is that many with the opportunity to move up have become tenants. This has driven the investment property growth as well.

Nov 02 09:56 AM

[Nick Rao:]

The incentive is being introduced in the Senate by Chris Todd (OMG not again) and Johnny Isacson (the Atlanta real estate mogul). These senators seem clueless on the negative impact that these incentives will have on the buying mentality and the inevitable fall after they expire (eg cash for clunkers). Combine this with the FHA's current lending practice ("there was a bad loan housing bubble?" FHA), creates a recipe for another disaster. It seems we've entered a new age of self destructive behavior and I am afraid that there is nothing to be done except us crying from the wilderness.

Nov 02 10:21 AM

[Tony Petroski:]

Mr. Mark:

'Now that we have a new (and improved) tax credit of $6500 rolling through Congress..."

It's not new and it's not improved (former subsidy was $8000).

On the other hand, some people live in their homes.

Nov 02 11:39 AM

[TraderMark:]

No, we are keeping the $8000 for 1st time
although in theory its supposed to be reduced over time

we are introducting a NEW $6500 for the "move up" buyer

2 separate "handouts", 1 new...


On Nov 02 11:39 AM Tony Petroski wrote:

> Mr. Mark:
>
> 'Now that we have a new (and improved) tax credit of $6500 rolling
> through Congress..."
>
> It's not new and it's not improved (former subsidy was $8000).<br/>
>
> On the other hand, some people live in their homes.

Nov 02 12:38 PM

[Radardoc:]

On Nov 02 09:56 AM Smalltownbanker wrote:

"When the first time buyer purchases it allows the seller to move up."

Unless that sale was a forclosure (and we know how rare those are these days). Then that move up will happen in about 5-7 years as a first time home buyer!

Nov 02 02:15 PM

[Plant the s...:]

Housing market will improve once the inventory levels are closer to demand, so inventory clearing can play an important role in market recovery.

Nov 03 10:50 AM

[Michael Clark:]

Buy one house, get a second one free. No money down. Government check is in the mail.

(So long middle-class. It was nice knowing you.)

Just what we need, another bubble. Don't the idiots in Washington comprehend what the last three bubbles did to us: internet; housing; commodities.

Next bubbles to burst: commercial real estate (bursting); treasury bond market (poised); housing bubble (phase two)...

Nov 03 03:03 PM