The first-time buyer share of the market is too high. It should be 30%, but it's currently hovering in the low 40% range.

We’re programmed to panic when a housing statistic goes down. But housing is an interdependent industry where one person’s activity causes additional activity, and first-time buyers start it all. The first-time buyer share of market statistic is one of those cases where lower is better. As first-time buyer share shrinks, trade-up share expands and total sales rise.

Picture a four-step ladder with homeowners standing on the steps. When a first-time buyer gets on the first step and bumps someone up to step No. 2, that person in turn bumps someone else to step No. 3 and so on. But no one moves up the ladder unless a first-time buyer takes the first step.

In this four-step ladder scenario, the first-time buyer represents one of four sales or 25% share of that particular market. Had our first-time buyer chosen not to get on the trade-up ladder but instead had purchased a vacant home, they would only have generated one sale (their own), and they would be 100% of that particular cycle while the other people on the ladder would remain stranded.

Therefore, if first-time buyer share of market is 33%, it should be reported that on average, each first-time buyer is causing three sales. If share of market is 25%, it should be reported they are each causing four sales. At 20%, the market would be booming at five sales each. At 40%, first-time buyers would each be causing only 2.5 sales, leaving many sellers standing on the ladder without a buyer to bump them up.

The first-time buyer share of market is the barometer we can use to measure whether first-time buyers are causing absorption or buying vacant homes. It’s not a measure of how many actual first-time buyers there are, rather, it’s a measure of their behavior once they enter the market.

As another example, if there are 100,000 first-time buyers in the market one month and they each buy a vacant home, there would be 100,000 sales nationwide, first-time buyer share of market would be 100%, and no one else would be “forced” to move. However, if those same 100,000 first-time buyers each bought from an owner occupant, each resulting in four sales as described above, there would be 400,000 sales nationwide and first-time buyer share of market would be 25%.

It may very well be true that first-time buyer share of market used to be 40%, but that doesn’t mean this is an appropriate or sufficient number as we move forward.

As the market prepares for baby boom liquidation and inventory levels yet to be projected, it’s critical that the first-time buyer share of market statistic be redefined and properly interpreted to keep a pulse on whether absorption rates are where they need to be.

If 2016 year-end sales totals hit 6 million and first-time buyer share of market is 33%, it would stand to reason that this means there were 2 million first-time buyers. Is this enough? What if there are twice as many sellers next year but still only 2 million first-time buyers? What if those 2 million first-time buyers suddenly gravitate disproportionately toward vacant homes?

These questions can’t be left to chance. A strategy needs to be implemented that has a dual goal of both increasing the number of first-time buyers as well as lowering their share of market to increase absorption.

What’s the solution? It’s two-fold:
1) We need as many first-time buyers as possible.
2) We need them to get on the trade-up ladder as often as possible to create enough additional buyers to equal 25% share of market.

A federal program should be structured and ready to be launched to encourage first-time buyers to purchase from owner occupants. Should inventory levels suddenly rise or if absorption suddenly falls—with the lever being a rise in first-time buyer share of market—action can be taken immediately instead of losing years to studying and debating. This could look similar to the former first-time buyer federal tax credit, but it should be restricted to owner occupant purchases.

Any current state, county, or local first-time buyer assistance programs such as down payment grants should be modified so that they are available only to first-time buyers buying from an owner occupant. An incentive of this type will strategically drive first-time buyers into the hands of homeowners to achieve required absorption levels. The concentration of demand pinpointed at owner occupied properties will also stabilize prices and mitigate foreclosures as homeowners in distress are more likely to achieve a sale. Builders will be the huge winners as they are the recipients of much needed trade-up buyers freed from their previous homes.

In the absence of a specific strategy, leaving the market to chance as the baby boom ages and prepares to liquidate could result in prolonged oversupply of inventory despite rising sales fueled by the echo boom.

The coming years could realistically break all sales records yet still reflect oversupply, falling prices, and increasing foreclosures.

Right now, we’re in the eye of the storm. This is not a time to relax, but rather to plan.