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Obama announces new initiatives for first-time homebuyers


Jan. 9 2015, Published 9:18 a.m. ET

First-time homebuyer: The key to a full recovery of the real estate market

In a speech in Phoenix, President Obama outlined a regulatory change meant to bring the first-time homebuyer back into the market. Since the real estate bust, the percentage of purchases attributed to the first-time homebuyer have been below historical norms except for a period right after the Obama Administration took office. Historically, the first-time homebuyer has represented just over 40% of all purchases. Today, that number is closer to a third of all purchases.

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Obama directs FHFA to reduce insurance payments

Ever since the real estate bust, the Federal Housing Finance Agency (or FHFA) has been in charge of the US residential real estate market. Currently, about 90% of all new origination is backed by the US taxpayer. The FHFA is the conservator for Fannie Mae and Freddie Mac as well. Ed DeMarco, the previous acting chairman of the FHFA, raised FHFA insurance rates to protect the fund in case there was another meltdown. He raised insurance premiums from 55 to 135 basis points per year. Most economists believed the government was underpricing its guarantee. President Obama directed the FHFA to cut the premium to 85 basis points and help find ways to reduce investor overlays. Investor overlays are restrictions lenders require in addition to the ones the government requires.

Implications for homebuilders

Homebuilders have largely been living off the luxury and move-up buyer since the bubble burst. Builders like Toll Brothers (TOL) and NVR (NVR) are the ones with the highest price points. More diversified builders such as PulteGroup (PHM) and D.R. Horton (DHI) have focused more on the first-time homebuyer. It appears that these builders are anticipating more activity at lower price points and are rolling out brands to address this segment. Investors who are interested in investing in the sector as a whole should look at the S&P SPDR Homebuilder ETF (XHB).

In the next section, we’ll address how the markets have reacted.


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