First-Time Buyers Aren't AWOL, After All

"It ain't what you don't know that hurts you. It's what you know for certain that just ain't so." — Mark Twain

Everyone knows what’s ailing housing. Inflated home prices, overly tight credit, sky-high school debt—a host of factors have contributed to declining affordability, and that shut the door on homeownership to the Millennial generation just as it began to enter its prime home-buying years.

Every year, surveys from the National Association of Realtors (NAR) illustrated the results. First-timers as a percentage of all home buyers fell from the low 40s during the last boom to the low 30s after the Great Recession, and never bounced back.

One catch: A new study from the Federal Reserve Bank of New York says NAR’s data is wrong. Working from a sampling of U.S. households much larger than NAR’s, the New York Fed found that from 2000 through 2016, first-time buyers accounted for a minimum of 40% and as much as 51% of all home purchases. First-timers averaged 44% to 45% throughout the 17-year period, and made up 46% of the total in 2017.

Moreover, Millennials have been pulling their weight and then some. The oldest turned 25 (typically the minimum age when people buy their first home) around 2007. Since then, the median age of a first-time buyer has fallen from 37.2 to 35.4.

That doesn’t mean homes are just as affordable as they’ve always been. According to data compiled and tabulated by the Harvard Joint Center for Housing Studies In its 2018 State of the Nation’s Housing report, the median price-to-income ratio in the U.S. (home price as a multiple of household income) rose from 3.11 in 1990 to 4.16 in 2017.

That’s a 34% increase, which is considerable—unless you look at the big picture.

Numbeo.com compiles housing and cost-of-living data from around the world. According to Numbeo’s data, the 2019 U.S. price-to-income ratio is the second lowest of the 93 countries it tracks.

In fact, it’s not even a horse race. In 85 of the 93, the ratio is more than double that of the U.S. Our most expensive major metro, San Jose, Calif. at 9.99, is still cheaper than 62 of the 93 countries.

The reality is that, next to Saudi Arabia, the U.S. is the most affordable place to buy a home this side of the moon.

Some would argue that’s misleading because of rising income inequality: The U.S. may be affordable overall, but working- and middle-class workers have not seen the same prosperity as the affluent. That's true as far as it goes, but it's not the whole story.

Since Jan 1990, production and non-supervisory workers’ wages have risen 16% after adjusting for inflation. $10.04 per hour in 1990 equals $20.03 today, and the average hourly wage as of Mar 2019 was $23.27.

Yeah, that only covers half of the 34% increase in home prices. But raw prices aren’t the only measure of affordability.

From a practical standpoint, the most important factor isn’t the value of your home—it’s whether you can comfortably pay your mortgage. According to the Harvard Joint Center’s data, the median payment-to-income ratio—i.e., the percentage of monthly income that goes to your mortgage payment—fell from 39% in 1990 to 33% in 2017.

Again, individual MSAs are all over the board. But the fact that San Francisco and New York City are out of reach for many buyers doesn’t mean the housing market is broken. The solution is simple: Don’t go there.

Young buyers seem to have it figured out already. Debt.com’s list of the ten most popular cities among Millennial homebuyers includes Denver and Salt Lake City, but also Kansas City, Pittsburgh, St. Louis, Buffalo, and Columbus.

All this is not to say affordability is not a problem. It’s a serious problem for some people, and many of them deserve a helping hand. The point is that construction suppliers should be cautious about major strategic moves based on the assumption that housing has a structural problem that won’t go away until we address it.

In Aug 1981, total annualized housing starts were just 611,000 for a very good reason: The average interest rate on a 30-year fixed conventional mortgage was 17.29%.

Exactly two years later, starts had more than tripled to 1,910,000. The pessimism of 1981 had completely evaporated and buyers were scrambling to take advantage of mortgage rates that had plummeted to a mere 12.78%.

All problems look difficult when you’re buried in them. Perceived problems have a way of disappearing on their own.

Greg Brooks is the editor of LBM Executive and moderator of the Executive Council on Construction Supply. He is a steering committee member at the Harvard Joint Center for Housing Studies and a 49-year veteran of the construction supply industry. 303.845.4880