The NAR’s Faulty Facts Lead to Faulty Conclusions

This article was originally published HERE. For more articles from Tobias Peter or The American Enterprise Institute, you can visit aei.org.

Earlier this month the National Association of Realtors (NAR) released its annual Profile of Home Buyers and Sellers (NAR Profile). The report, which attracted widespread media attention, was based on a survey of home buyers from July 2014 to June 2015 and showed that first-time buyers accounted for only 32% of all home purchases, down from 33% the year before.

The NAR was quick to jump to its usual conclusion: “It’s still too difficult for some to get a mortgage.”  This call for looser lending will expose first-time buyers to even higher levels of default under both normal and stressed economic conditions. This is more than reckless.

To begin with, the NAR’s data are wrong.  The actual trend in the first-time buyer percentage is not down, but up.  While the NAR Profile is based on responses from only 6,400 homebuyers — thus covering just 0.2% of all mortgages originated during the year — a much better data source exists.   The First-Time Buyer Mortgage Share Index (FBMSI) published by AEI’s International Center on Housing Risk’s (ICHR) is based on a comprehensive dataset covering an estimated 90% of all primary owner-occupied home purchase loans and 96% of all first-time buyer purchase loans.[1]  The latest release showed that the first-time buyer share was 56.0% in October, up from 53.7% in October 2014.[2]

The same upward trend holds when comparing the average share over the same 12-month periods as in the NAR Profile.  Instead of the NAR Profile’s downward trend, the FBMSI shows an upward trend, turning the NAR’s headline — “First-time Buyers Fall Again in NAR Annual Buyer and Seller Survey” — on its head.

The NAR adds to its false narrative by concluding that “first-time buyers [are] stuck on the sidelines.”  To the contrary, ICHR data shows first-time buyers leading the sprint this home buying season.  First-time buyers took out an estimated 144,000 loans in October, up 21% from a year ago.  Year to date, they are up 17% compared to the same period last year.  Loans for repeat buyers are also increasing, but at a much slower pace.  For the year to date, these loans are only up 7% compared to the prior year.

However this increased first-time buyer share comes with a downside: greater reliance on looser lending.  The ICHR’s release shows exactly that.  The Agency first-time buyer risk index (FBMRI), which measures the risk of all government-backed mortgages, stood at 15.6% in October, up 1.2 percentage points from a year earlier. The index estimates the share of first-time buyer mortgages that would default in a stress event comparable to the 2007-08 financial crisis based on the actual performance of loans originated in 2007.  The Agency FBMRI is 6 percentage points higher than the mortgage risk index for repeat homebuyers, and the gap has been widening.  Last month, 70% of first-time buyer mortgages had a combined loan-to-value ratio (CLTV) of 95% or higher.  Moreover, the median FICO score in October for first-time buyers with agency mortgages was 708, slightly below the median of 713 for all individuals in the United States with a score.  For first-time buyers with FHA-insured loans, the median FICO score in October was only 677, well below the middle of the distribution for the US as a whole.  These findings suggest that lending standards are already loose, and that a return to more prudent standards is called for.

Conflicting results from another flawed NAR survey on this topic add to the confusion caused by the NAR.   The NAR’s monthly REALTORS Confidence Index shows that the first-time buyer share increased 2 percentage points between July 2013-June 2014 and July 2014-June 2015, the same period over which the NAR Profile recorded a 1 percentage point decrease. The conflicting results from the two surveys are not a surprise given that both have very low response rates and cover only a tiny fraction of the purchase loan market.

The NAR is relying on faulty facts to support faulty conclusions in support of a self-interested policy agenda.  The NAR business model after all relies on looser and looser lending to first-time buyers to fuel its own brand of rent seeking.  The ICHR by contrast is a truly independent and accurate source of information on housing risk — underpinned by the most comprehensive data available.

[1] The ICHR assumes a first-time buyer share of 20 percent for the remaining 10 percent of the primary home purchase loans originated without a government guarantee.  Under this assumption, the Agency data used by the ICHR captures 96 percent of the purchase loans taken out by first-time buyers.

[2] The gap between the higher share in the ICHR data and the lower share reported by the NAR largely appears to reflect a difference in the definition of first-time buyers.  In the federal agency data that the ICHR uses, first-time buyers include purchasers who owned a home more than three years ago but not in the past three years.  The NAR surveys ask whether the purchaser is a first-time buyer, without further instruction.  Survey respondents likely apply a literal definition of first-time buyers, which would exclude purchasers who owned a home more than three years ago.  The broader definition in the federal agency data captures the full set of households transitioning from renter to homeowner status and thus provides a more complete measure of changes in demand for owner-occupied housing.