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Number of first-time U.S. home buyers below historical average

Potential home buyers exit an open house in Redondo Beach, Calif.

Potential home buyers exit an open house in Redondo Beach, Calif. PHOTO: BLOOMBERG NEWS

Roughly three million potential first-time home buyers have been shut out of the market over the last decade, according to a new study, suggesting the market’s recovery of the past few years could have been stronger.

Tight lending standards and acute shortages of affordable housing in many markets have reduced the pool of potential buyers, particularly among young people, reducing a key component of housing demand.

First-time buyers are a critical area of focus for housing economists in part because they drive new demand for housing. They often serve as buyers of starter homes, allowing those homeowners to trade up.

“They provide that greater mobility to the overall housing market. Without first time buyers the market becomes much more stagnant and less dynamic,” said Lawrence Yun, chief economist at the National Association of Realtors.

In all, the number of first-time U.S. home buyers averaged 1.5 million a year over the last decade, compared with the historical average of 1.8 million, according to a new study to be released Thursday by Genworth Mortgage Insurance that examines mortgage data from Fannie Mae, Freddie Mac, the Federal Housing Administration, Veterans Affairs and other sources. The study looked at data going back to 1994 and defined first-time buyers as anyone who hasn’t owned a home in the last three years.

Lackluster demand for homeownership among younger people has been one of the main factors holding back the housing recovery. Many young people have been delaying buying homes due to tight credit, student loans and rising rents that have made it difficult to save for down payments.

“What’s been missing is confidence,” said Sam Khater, deputy chief economist at CoreLogic Inc.

But that is starting to change. So far this year, first-time buyers represented about 38% of the market, greater than the historical average of 35%, according to Genworth. Some two million first-timers purchased homes last year, or 37% of the market.

“We’ve had a very strong surge in first-time home buyers,” said Tian Liu, chief economist at Genworth.

A number of factors are propelling first-time buyers into the market. Many are entering their 30s, marrying and having children, and need more space than they can get by renting.

Credit also appears to be loosening. According to Genworth, about 78% of first-time buyers are using low-down-payment loans, compared with the historical average of 73%.

Economists said a wave of first-time buyers is likely coming over the next decade, as a large cohort in their mid-20s begin to buy homes.

“As we’re seeing millennials age into homeownership, there’s a huge tailwind coming,” said Nela Richardson, chief economist at Redfin.

To cater to rising demand from first-timers, home builders are starting to build less expensive homes after years of focusing mainly on the upper end of the market.

U.S. homes got smaller last year for the first time since the recession. The median size of a new single-family home slipped 2% to 2,422 square feet in 2016, according to Census Bureau data released last week. While that is a small adjustment, it is the first time since 2009 and only the third time in the last 20 years it has fallen.

Activity from repeat buyers, meanwhile, is now below historical levels, according to the Genworth survey. About 1.6 million repeat buyers financed home purchases last year, compared with the 22-year average of 2.4 million a year.

That reflects declining mobility as homeowners move less due to the fact that they are underwater on their mortgages, they enjoy historically low mortgage rates or there are fewer enticing job opportunities.