The National Association of Realtors released on Sunday that the percentage of first-time home-buyers as a percentage of overall sales rose form 39% to 41% in October. The group cited low prices resulting from an over-supply of homes for sale for bringing more first-timers into the market. If history is any predictor, this is a positive sign for the housing market.
In past recessionary economies and downturns in the housing market, many homeowners sit on the sidelines waiting for an indication as to the future direction of the market. First-time home-buyers, on the other hand, tend to be fence-sitters. They watch the decline in home prices with one eye while keeping the other on interest rates. Since most sluggish economies, this one included, are coupled with lower rates, these potential home-buyers wait for their perfect equilibrium of home price and affordable mortgage rate. When that point is reached, they hop off the fence and take the plunge.
I have seen this scenario played out several times in my career. The entry of more first-time homebuyers is usually a prelude to a turnaround in the housing market. As more first-timers enter the market, the simple supply and demand fundamentals begin to take hold. As the number of homes on the market begins to fall, the combination of low prices and low interest rates brings more first-timers into the market. Those homeowners who have been either on the sidelines or stuck in their homes while they sat on the market, now find themselves ready to take the plunge back in as well. This has the domino effect of reducing inventories and driving up home prices which leads to even more buyers getting into the market before the attractive prices disappear.
We have seen several positive indicators in recent months that show a bottom in the housing market may be near. Slowing home price depreciation, a slowdown in the rate of foreclosure and declining inventories to name a few. This most recent news, however, signals to me that a turnaround in housing is coming. An increase in the percentage of first-time home-buyers has always been a harbinger of better times ahead. This time should be no different.
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