First Timers

Steve ByersHome Sales, Housing Affordability


1 min read

Best Markets for 1st Time Home Buyers


What is the “best” market for first time homebuyers? A recent piece by Lending Tree suggests that Denver is one of the worst markets for first time buyers. The basis for their assertion is that the percentage of homes with FHA loans is too low in Denver and buyers are putting too much money down to get in the game. They further claim that markets like Little Rock are superior for first timers for the inverse reason.

Let’s explore that a bit. One of the biggest concerns for any buyer, but perhaps especially a first time buyer is that the investment that they’re making, likely the largest of their lives, is “safe”. What’s “safe”? we would contend that safe means that it has a likelihood of appreciating in value. Fair enough?

So, which market is more likely to increase in value? Denver or Little Rock? Even when, not if, the Denver market deflates, what is the long-term prospects for each respective market. Let’s look at historic appreciation:

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Zillow Home Value Index data show that U.S. home values overall appreciated at a 3.4% annual rate from January 1998 to January 2018, for a total of 95%.  The ‘most challenging’ markets listed in the LendingTree analysis – New York, San Francisco and Denver – experienced considerably stronger home value gains over this period, appreciating at annual rates of 4.9%, 7.1% and 5.1% respectively.  LendingTree’s ‘best’ housing markets for first-time buyers appreciated at a much slower pace, with Birmingham and Little Rock home values rising at rates of just 2.0% and 2.7%.

Additionally, looking at latest available income data we see that while home values have increased at a faster rate than incomes in the New York, San Francisco and Denver metro areas, home values in Birmingham and Little Rock have lagged income gains, with the Zillow Home Value Index-to-Income ratios falling between 1998 and 2016 in the latter cities.  Sure, this means better ‘bang for your buck’ if buying a home in Birmingham or Little Rock, but does not bode well for the performance of your investment.

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The LendingTree analysis also points to low down payments (absolute and as a percent of the purchase price), high shares of FHA loans, and non-prime loans as strong points for the Birmingham and Little Rock markets.  We maintain that, while these factors may help first-time buyers ‘get their foot in the door’ and find a home to purchase, they do not signal long-term health and resilience for the market overall.  This is demonstrated by the elevated share of delinquent mortgages in Alabama and Arkansas when compared to either LendingTree’s ‘worst markets’ or the aggregate U.S. rate.

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What Lending Tree is claiming is that markets with arguably more challenged buyers and considerably less solid loan to value ratios are somehow superior to markets with more affluent, less challenged buyers. This frankly seems bassackwards. This is not meant to disparage Little Rock, but to question assumptions that are being made about the term “best for first time buyers.”  After all, it’s not just whether you can buy the home, it’s what’s going to happen after that.

Ultimately, we believe that delinquency rate, loan to price ratio, and median sales price to income ratio are key factors for assessing market health for first time buyers, but our perspective differs from LendingTree’s on what levels are “best” when referring to these indicators.  Of course, the reality is that first time homebuyers are going to buy where they have to more than where they want to and are pretty unlikely to move to where the indices and the analysts tell them they ought to. That said, with affordability an ever present concern for the market in general, let’s be nuanced in our analysis of whether a market is good or bad for a particular buying segment.

About the Author
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Steve Byers

Steve Byers is the CEO of Housing Tides and EnergyLogic. In that role, he guides EnergyLogic into its second decade. He has a background in residential construction and energy efficiency. Along with that he has a passion for making disparate connections and doing his part to better understand the world. He believes that with understanding we all make better decisions and the world becomes just a little bit better.