Special Studies, January 23, 2008
Elliot F. Eisenberg, Ph.D.
Report available to the public as a courtesy of HousingEconomics.com
First-time home buyer trends are important to both forecasts of housing production and policies designed to promote homeownership. At the margin, net increases in the number of home owners largely determine how much new, owner-occupied housing the economy requires. For policies designed to promote home ownership (which include the mortgage interest deduction and other tax incentives, government insurance and guarantees on mortgages, fiscal and monetary policies that keep interest rates low, and local policies to reduce fees on new construction), the primary objective is to bring benefits of home ownership (such as wealth accumulation and stable, well-maintained neighborhoods) to households that haven’t before experienced them.
The characteristics of first-time buyers are thus of interest to sellers and builders of homes targeted to this segment of the market, who want to understand who their customers are, and policymakers who want to understand who homeownership-promoting policies tend to benefit.
This article looks at the characteristics of first-time home buyers, the homes they buy, and how they buy them, using data from the most recent (2005) America Housing Survey (AHS). Among the key findings is that first-time buyers were, on average, about 33 years old, had a household income of almost $64,100, bought a house with a median price of $150,000 and accounted for 43 percent of homes sold.
The AHS is a biennial  survey of housing units, conducted in odd-numbered years by the Census Bureau for the Department of Housing and Urban Development. The 2005 AHS contains 897 interviews with households who bought their first homes during the year before the survey was conducted. Each unit is assigned a weight by the Census Bureau that allows extrapolations about the entire US population to be made based on the results obtained from these interviews. The result shows that almost 2.4 million households bought their first homes during that year.
Although this article focuses on first-time home buyers (be they buyers of existing homes, new homes, custom homes, speculative homes, single-family homes or multifamily homes),  for purposes of comparison move-up buyers are also discussed.
Among the nearly 2.4 million households that bought a home for the first time, the average age of the householder was 33 years old (see Table 1). Almost two-thirds of these householders were under age 35 while less than 5 percent of these householders were over age 55. By contrast, among move-up buyers the average age is 45. The average size of those households was 2.7 persons. Not surprisingly, about one-third of first-time households contained two persons with another one-fifth of these households being composed of one person and roughly another one-fifth being a three person household. The remaining roughly 25 percent of this population had more than three persons in the household. The average and median household size for move-up households is virtually identical to first-time buyer households.
The average first-time buyer household had an income of $64,074. By contrast the average income of move-up buyers was $84,170, while for non movers it was $72,957. These results show that generally speaking first-time buyers have lower incomes than move-up buyers and non-mover owners. 
The ratio of household income to the area median income (AMI) is about one. This suggests that first-time buyer households appear to have incomes that are quite typical for where they live. Almost two-thirds of first-time buyer households have incomes that are between 50 percent and 150 percent of the AMI, while 17 percent have incomes greater than 150% of AMI and 18 percent have incomes below 50 percent of the AMI.
By comparison, the same ratio for move-up buyers is 1.5. This again illustrates that move-up buyers have substantially higher incomes than first-timers. This is largely because move-up buyers are older than first-time buyers, as we have seen, and because move-up buyers are very likely to have experienced income growth subsequent to the first home purchase that is in part what makes the move-up purchase possible.
Other highlights from Table 1 include the fact that about 31 percent of first-time buyers are married with children, one-person households are about twice as likely to be male headed as female headed, but single parent headed households are about twice as likely to be female headed as male headed. About two-thirds of first-time buyers are white non-Hispanics, 11 percent are black non-Hispanics and almost 15 percent are white Hispanics. Lastly the percentage of first-time buyers that were previously renters is about 77 percent; the remainder formed a new household as part of the purchase.
Looking at Table 2 it can be seen that the homes purchased by first-time buyers had a median value of $150,000. By contrast, the median price of a move–up home was $230,000. Note that about two-thirds of first-time buyers bought homes that cost less $200,000, while that same percentage for move-up buyers is slightly more than 40 percent. At the other end of price spectrum 17 percent of move-up buyers bought a house that cost more than $500,000 while only six percent of first-time buyers could afford such a house.
The median square footage of homes bought by first-time buyers is 1,500 while it is 2,000 for repeat buyers. Since new homes have been growing larger for several decades, the difference in size is evidence also of the general trend for first-time home buyers to purchase older homes. Looking back at Table 2 the median age of homes bought by first-time buyers is 33 years, but only 18 years for move-up buyers.
As for the type of home bought, a large majority of first-time buyers, almost 79 percent, purchased single-family detached houses, while a shade less than 11 percent of these buyers purchased townhouses and another 11 percent purchased condominiums. Interestingly, among move-up buyers almost 88 percent purchased a detached house, while almost seven percent purchased a townhouse and almost six percent a condominium. While these findings suggest a strong preference for detached housing over other alternatives they also make clear that attached housing and condominiums are more popular among first-time buyers because of their relative affordability.
Almost 86 percent of first-time buyers purchased an existing house, while the remaining buyers either bought a speculatively built home or a custom home. Given that new homes are usually more expensive than existing homes, these results are not surprising. By contrast, 73 percent of move-up buyers purchased an existing house, while the remaining 27 percent bought a new home. In short, roughly twice as many move-up buyers bought a new house compared to first-time buyers.
Table 3 shows that among first-time buyers, about 16 percent had no mortgage. Among the remaining buyers, the average loan-to-value ratio (or LTV) was 87 percent. This means that that the value of all debt secured by the house  is on average worth 87 percent of the current value of the home. The AHS data also show that slightly more than one-third of all first-time buyers with a mortgage were able to make a downpayment of at least 20 percent. By contrast, about 30 percent of first-time buyers borrow 95 percent or more of the purchase price of the home.
Among move-up buyers the results are quite different. Slightly more than 22 percent of move-up buyers have no mortgage and among those with a mortgage about 60 percent are able to make at a 20 percent downpayment. In short, first-time buyers are more likely to have a mortgage than move-up buyers and are less likely to make a 20 percent downpayment compared to move-up buyers.
Given the dramatic growth in the types of mortgage instruments available over the past decade it is interesting to observe that among first-time buyers with a mortgage almost 80 percent financed their purchase with a fixed rate mortgage (FRM), while only nine percent used an adjustable rate mortgage (ARM) to finance their home. Somewhat surprisingly move-up buyers were similarly inclined in their mortgage preferences. Among move-up buyers 80 percent also used a FRM and almost 10 percent used an ARM. Unfortunately, the AHS provides no information on creditworthiness and thus the percentage of sub-prime and Alt-A FRM and ARM mortgages cannot be determined.
Among first-time buyers with a mortgage, the average interest rate obtained was 5.85 percent, however, more than 14 percent of first-time buyers had an interest rate of seven percent or higher. It is also important to recall that during 2004 and 2005 interest rates were at or near historic lows for much of the time. Among move-up buyers, the picture is slightly different. These buyers were able to finance their purchases at a slightly lower average rate of 5.73 percent, and only about nine percent of these buyers paid an interest rate that exceeded seven percent.
Lastly, almost 56 percent of first-time buyers used personal savings to cover their downpayment with no other single source of financing being remotely close. By contrast, the most popular source of downpayment funding for move-up buyers was money from the sale of the old home with 53 percent reporting that source, while 25 percent reported using personal savings.
How one looks for a house to buy is also important, and here the difference between first-time buyers and move-up buyers is small. Among first-timers, the average number of homes looked at was about 12 the same as it was for move–up buyers. The percentage of first-time buyers who looked at more than 15 houses was almost 27 percent while it was 29 percent for move-up buyers. In addition, the percentage of first-time buyers who looked at more than one neighborhood was almost 63 percent while it was 62 percent for move–up buyers. Taken together these findings strongly suggest that where one looks for a home and how intensively one looks does not vary much with experience.
The AHS also asks a number of questions about why the buyer bought the particular house they did. The reason most often cited by first-time buyers is price at 31 percent of respondents, followed by the layout/design of the unit at 22 percent, with size in third place at slightly over 11 percent, with no other reason receiving greater than seven percent. When asked to list all reasons why the house was bought (not just the primary reason) price was again first with about 40 percent of the total followed closely by the layout/design of the unit at nearly 39 percent, and size at a little over 28 percent. Other reasons that mattered included the yard at 21 percent, building exterior at 19 percent and quality of the home at 17 percent. However, the three most important factors regardless of how the questions were asked were price, design and size.
Among move-up buyers the biggest three reasons are the same but the order is different Here layout is the number one response at almost 29 percent, followed by price at almost 16 percent and size of unit at almost 14 percent. And when asked to list all the reasons layout is again the most popular at almost 46 percent, with size next at almost 32 percent and price third at exactly 24 percent.
The AHS also asks a number of questions about the neighborhood and why it was chosen. As was the case with the house, the reasons mentioned here are very much the same for both first-time buyers and move up-buyers but again with the order of the preferences slightly rearranged. When asked to give the most important reason why the neighborhood was chosen, more than 34 percent of first-time buyers cited the presence of the particular house they bought as the primary factor. The next most popular single reason cited was the look/design of the neighborhood, with proximity to work being third. For move-up buyers the look/design of the neighborhood was ranked first at 23 percent, followed closely by the presence of the house at almost 22 percent and proximity to friends and proximity to job at 10 percent each.
When asked to list all the factors that came into play when deciding upon the neighborhood, first-time buyers once again ranked the presence of the house itself as the primary factor with look/design of the neighborhood second, proximity to work third and proximity to friends and family fourth. For move-up buyers the rank order is look/design of the neighborhood, presence of house, proximity to work and finally proximity to friends and family.
In brief, despite a very large number of categories to choose from, both groups of buyers place heavy emphasis on the design of the neighborhood, the house itself, proximity to work and proximity to friends and family when choosing which neighborhood to live in. The only substantial difference is that new buyers consistently value the presence of the house above the look and design of the neighborhood while move-up buyers reverse the two.
First-time home buyers are a substantial segment of the home buying population accounting for about 43 percent of all home sales.  In some ways they are different than move-up buyers but in other ways they are very similar. First-time buyers are younger, have lower incomes, and buy less expensive smaller homes than move-up buyers. First-time buyers are also more likely to have a mortgage, pay a slightly higher rate on their mortgage, and have a higher LTV ratio than move-up buyers. However, when it comes to choosing a house and a neighborhood, both groups are quite similar. Both look at an equal number of units and place emphasis on proximity to work and friends when choosing a neighborhood, however, first-time buyers are more sensitive to price while other buyers are more attuned to the design and feel of the area.
 From its inception in 1973 through 1981 the AHS was conducted annually.
 Manufactured homes are excluded from this analysis
 As an aside, finding that that average value is higher than the median value is typical because there are always some households with extremely high incomes, large families, buy expensive homes or are very old which raise the average but not necessarily the median.
 Including first, second, third and fourth mortgages.
 According to the 2005 AHS. This number averaged 41.75% during the 1980s and 1990s.
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