PhotoOne statistic jumped out of last week's report on existing home sales. Sales in September were up slightly but who was buying might be more significant.

"Despite persistent inventory shortages, the housing market has made great strides this year, backed by an increasing share of pent–up sellers realizing the increased equity they've gained from rising home prices and using it towards trading up or moving into a smaller home," said National Association of Realtors chief economist LawrenceYun. "Unfortunately, first–time buyers are still failing to generate any meaningful traction this year."

Over the last year and a half, first-time buyers had been returning to the housing market, purchasing entry level homes that allowed those owners to move up, providing fuel for an accelerating housing market.

Down to 29% of sales

But first-time buyers fell to 29% of sales in September after climbing to their highest share of the year in August – 32%. First-time buyers are back to the level they were a year ago.

What happened to this group? Jonathan Smoke, chief economist at, admits the drop was a surprise but suggests it could be a temporary pause in activity.

“Despite that decline, we estimate from the monthly sales data this year that first-time buyers have been responsible for 45% of the growth in sales over last year,” he said. “The September share decline may simply reflect more competition in September by repeat buyers whose closings slipped in August due to the stock market disruptions.”

When the stock market drops suddenly, it can affect the housing market. That's because at least one in five buyers funds a portion or all of their purchase with stock or retirement accounts.

“But barring stock corrections that reflect real economic downturns — which we are not experiencing — home sales typically return to the prior trend after stock values stabilize.” Smoke said.

Tight supply

Tight supply, meanwhile, is an impediment to future growth. Smoke is concerned that the homebuilding industry is not producing enough new construction to fill the void. As a result, he says the market should experience a tight supply for the year ahead.

With first-time buyers heading to the sidelines last month, a few more investors returned to the market. All-cash sales rose to 24% of transactions in September.

Individual investors, who account for many cash sales, purchased 13% of homes in September, up from 12% in August but down from 14% a year ago. Three years ago, investors accounted for 30% of monthly sales.

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