Homebuilders see a changing customer profile emerge

Even before the lock-in effect changed the dynamics of the housing market, first-time buyers had their eye on new constructions with their share of transactions more than doubling in five years. 

Between 2016 and 2021, the share of newly built single-family residences sold to first-time buyers expanded from 19% to 43%, according to data from the National Association of Home Builders/Wells Fargo Housing Market Index. 

Surging mortgage rates have been a major factor contributing to low existing inventory, since they dampen homeowners' interest in listing their homes and shopping for a new home at a higher interest rate, which has comparatively led to increased activity for builders since 2022. NAHB's data, though, showed first-time buyers' interest in homebuilder options rising before then and decreasing only marginally since. 

In 2016, the share of new-home market purchase activity by first-time buyers stood at 16% and jumped to 32% in 2018. No data was collected for 2019 and 2020, but by 2021, the share accelerated to 43%.

While restrictions during the COVID-19 pandemic may have altered typical buying and selling patterns, the share stayed at 42% in 2022. In the past two years, the percentage narrowed, with first-time home buyers accounting for 40% of new-home sales so far this year, coinciding with quickly rising mortgage rates.

As interest rates decrease, homebuilders may stand to see more benefits, with existing housing listings still well below what is needed to adequately meet current demand. 

Falling supply costs have helped builders in the last year, but in order for the housing market to gain better balance, the focus will need to shift to the affordable end of the market. 

"I think you will start seeing more building, but that really needs to ramp up," said Scott Haymore, head of mortgage capital markets and product management at TD Bank. "It really needs to ramp up in the affordable space, lower-to-moderate income housing and not high-end homes that we've seen here in the last few years."

Still, NAHB's data points to robust demand among aspiring homeowners, and recent moves from federal agencies, including $85 million in grants, could spur investment. 

"I think that's where they could probably play the most powerful role — incentivizing developers to build those homes in those LMI areas. I think that could really kickstart, at the beginning, step one in increasing housing supply," Haymore said. 

The largest builders were more likely to see a greater share of first-time home buyers in the mix. Companies responsible for more than 100 starts in a year said 44% of sales so far this year went to those consumers. On the other end, homebuilders with less than five starts annually reported only an 18% share from new homebuyers.

Recent borrowing trends also show signs of pent-up demand for new constructions among first-time buyers. The share of Federal Housing Administration-backed loans regularly hit new record high shares in 2024, according to the Mortgage Bankers Association's monthly builder surveys. FHA loans, which are often taken by first-time buyers for entry-level or starter properties, grew again to a 29.6% share of new-home application volume in August. 

Across all loan types, the number of applications increased 4.4% year over year but flattened from July on an unadjusted basis. Annual growth increased for the 19th consecutive month. 

Meanwhile, the estimated annualized pace of new-home sales surged to 776,000, the fastest rate since February 2022, and up by almost 15% from July, MBA reported.