Is credit as tight as some analysts claim? American Enterprise Institute says no, because first-time buyers with so-so credit flooded the market last month.

  • The AEI took issue with observations put forth by the National Association of Realtors that credit standards are still too tight.
  • The International Center on Housing Risk is contending that first-time buyers are making low downpayments and have less-than-stellar credit.

Loosening credit standards and tight housing inventory helped fuel a surge in first-time homebuyer demand in November, according to the American Enterprise Institute’s (AEI) First-Time Buyer Mortgage Share and Mortgage Risk indices for last month.

In November 2015, first-time buyers accounted for nearly 57 percent of primary, owner-occupied purchase mortgages with a government guarantee, an increase of almost 2 percentage points above the November 2014 share.


Through March of this year, the first-time buyer share showed little change apart from normal seasonal variations, but the AEI observed that since April, the share has pushed above year-over-year levels, supported by improvements in the labor market, riskier mortgage lending and continuing low mortgage rates.

About 135,000 primary owner-occupied purchase mortgages went to first-time buyers in November, an increase of 19 percent from November 2014, the AEI said.

“Looser credit is fueling booming first-time buyer demand,” said Edward Pinto, co-director of the AEI’s International Center on Housing Risk. However, Pinto added that these factors, combined with a 38-month-long seller’s market for existing homes, are driving up home prices faster than income.

The indices, updated monthly, are “objective and transparent measures” of the first-time buyer share and the riskiness of first-time buyer mortgages based on loans contained in the National Mortgage Risk Index (NMRI) database.

According to the AEI, its data tell a different story from the one being offered by other organizations and analysts that first-time buyers are facing difficulties in obtaining mortgages. In particular, the AEI took issue with observations put forth by the National Association of Realtors (NAR) that credit standards are still too tight, blocking first-time buyers’ entrance into the market.

“Continued calls by NAR and other lobby groups for looser credit creates additional demand pressure, which in a seller’s market, will get capitalized into higher prices,” Pinto said. “While benefiting the NAR with higher commissions, this translates into greater price volatility and risk for low-income and minority buyers and the neighborhoods they live in.”

NAR, however, notes that its definition of first-time buyers differs from other agencies’. Some agencies (such as the Federal Housing Finance Agency) classify a first-time buyer as an individual who has not owned a home in three years, or divorced or single parents who repurchase a home.

NAR classifies a first-time buyer as someone who has never bought a home before. Therefore, comparisons between its data sets and others are problematic.

Stephen Oliner, Pinto’s International Center on Housing Risk co-director, contended that first-time buyers are making low down payments and have less-than-stellar credit, so “those who assert that credit is tight are ignoring the facts,” he said.

According to the AEI’s calculations, the median first-time buyer with an agency mortgage made a down payment of only 3 percent, or $7,200, in November, while the median FICO score for first-time buyers with agency mortgages was 706, slightly below the median of 713 for all U.S. individuals with a score. For first-time buyers with FHA-insured loans, the median FICO score in November was only 676, well below the middle of the distribution for the U.S. as a whole.

The AEI attributed the higher risk for mortgages taken out by first-time buyers to risk layering. According to its data, 70 percent of November first-time buyers’ mortgages had a combined loan-to-value ratio of 95 percent or higher, and 97 percent had a 30-year term. Given the combination of little money down and slow amortization, these buyers will have very little home equity for a number of years unless their house appreciates substantially, the AEI said.

In addition, about one-fifth of first-time buyers taking out mortgages had a FICO score below 660, the traditional definition of subprime mortgages, and slightly more than one-quarter had total debt-to-income ratios above 43 percent, the limit set by the Qualified Mortgage rule.

“My advice would be to ignore the problematic NAR data on first-time buyer activity,” Oliner said. “Our monthly reports provide the go-to source for accurate and objective information about first-time buyers.”

Email Amy Swinderman.

Show Comments Hide Comments
Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription