First American Study: Why Everything You Know About First-time Homebuyer Affordability is Wrong

May 9, 2019

Despite millennial demand for homes is increasing, traditional measures of affordability are skewed toward people that already own homes, offering a somewhat misleading perspective for potential first-time buyers, according to a new study from First American Financial.

In the report “Why Everything You Know About First-Time Home Buyer Affordability is Wrong,” First American Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi share insights and factors tailored to first-time home buyers.

“As millennials continue to age into their prime home-buying years, first-time home buyer demand is poised to increase in the years ahead. Yet, traditional measures of affordability are skewed toward existing homeowners who, by definition, can already afford homes,” said Kushi. “Unlike typical affordability studies, we’ve zeroed in on first-time home buyers and factored in often overlooked costs like private mortgage insurance and property taxes to provide a clearer assessment of the housing affordability landscape for first-time home buyers.”

According to First American’s economists, traditional measures of housing affordability compare median household income with the income required to purchase a median-priced home. However, from a first-time home buyer perspective, this metric inflates median income levels because it includes existing homeowners. Existing homeowners typically have greater income levels. In the fourth quarter of 2018, household income for owner households was $75,000, compared to $39,000 for renter households.

“More importantly, homes are already affordable for approximately two-thirds of Americans because 64.8 percent of Americans own homes. Existing homeowners, by definition, can already afford a home,” the report states. “So, any affordability metric that includes existing homeowners is wildly misleading to first-time home buyers.”

The study offers insight on the following trends:

  • Two Reasons First-Time Home Buyers Should Ignore Traditional Measures of Affordability
  • Property Taxes and PMI Included: A Better Way to Track House-Buying Power for First-Time Home Buyers
  • Affordability is More Than Just House-Buying Power
  • Top 10 Cities with the Largest Supply of Affordable Homes for First-Time Home Buyers

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