A recent batch of first-time homeowners are now feeling the weight of California’s housing crisis. Meet the young couples and families who were leveraged into their first home during the Millennium Boom price peak. For them, moving up to a bigger home is, for the foreseeable further, a losing battle.
These homeowners are now underwater and need larger homes to accommodate their growing families or to relocate near better job opportunities. For those homeowners who do not want to move out of their starter homes, even staying put is proving difficult since their adjustable monthly mortgage payments are increasingly putting a strain on their household finances. [For more information on first-time homeowners in California, see the July 2011 first tuesday Market Chart, First-time homebuyers and new housing.]
It’s the housing market’s slipping prices and slow sales which increasingly impede these negative-equity first-time homeowners. Though California home sales volume in August 2011 jumped from the month prior in July, the state’s yearly sales for 2011 remains at its lowest since 2008. Sales most probably linger around current figures until early 2012 when they will likely see a slight bounce. Our forecast is the same for sales prices as they continue to adjust until they drop a bit below their historic market value trendline, an event likely to occur around 2013. [For more information on trends in California home sales and prices, see the first tuesday Market Chart, Home sales volume and price peaks.]
first tuesday take: The first-time homeowner sell-out and move-up paralysis indicates a loss for California brokers and agents who concentrate their marketing efforts in farms comprising the mid-tier home sales market.
Consider the relationship here:
- In the natural scheme, pre-retirement buyers flow from one home pricing tier to another as they grow older since they are driven to move up the housing ladder to satisfy their family’s need for a larger space or to meet society’s expectations that they graduate from the smaller starter home to a bigger and better one.
- The vast majority of low-tier homeowners looking to climb this ladder to bigger-better housing have the jobs and the income to financially support the move and meet loan qualification standards to buy a mid-tier home.
- But they have a problem. They cannot sell their current home due to their inability to pay off the mortgage at current or foreseeable property prices for 10 to 15 years. Their negative equity has essentially imprisoned them in the starter home they own and no longer want. More importantly for brokers and agents, the negative equity in these low-tier homes adversely interferes with sales market volume for mid-tier properties.
The mid-tier home sales market today is starved for buyers. The typical prospective buyer in this market is middle-aged and already owns a home. A separate lesser number buying mid-tier level homes for the first time have waited and are fully qualified financially to make a 20% downpayment and obtain 80% financing.
Agents find these potential mid-tier homebuyers by marketing the message that the time to buy a mid-tier home is now since:
- prices are more likely to rise over the next five years than remain at or below their current dismally-low market values; and
- mortgage rates are now at near zero levels and they numerically cannot go much lower (but could easily slide to 3.5% in the third and fourth quarter of 2011). [For more information on pricing in California’s mid-tier property market, see the first tuesday Market Chart, California tiered home pricing.]
It all sounds like a good deal. Unfortunately, the immovable cow standing in the middle of the road is the prospective mid-tier buyer’s negative equity. In order to get out of this rut, brokers and agents must advise these first-time homeowners and aspiring mid-tier homebuyers to consider:
- renting their low-tier home and buying a replacement mid-tier home if they have enough in savings for a down payment [For more information on the forecast for renting in California, see the May 2011 first tuesday article, Rentals: the future of real estate in California?]; or
- buying a mid-tier home and strategically defaulting on their low-tier home if its rental value will not cover the mortgage payments since in California homeowners possess the legal right reserved to them by the put option in every trust deed and buttressed by antideficiency laws to walk away – a good thing for first-time homeowners since it allows them to save money (during the year-long foreclosure period) for a down payment on that mid-tier replacement home and spend any remaining freed-up income on California’s goods and services – a most rational and capitalistic solution. [For more information on the prudence of a strategic default for California’s underwater homeowners, see the July 2011 first tuesday article, Loan modifications walk the plank; California homeowners don’t have to follow.]
RE: “Generation of homeowners stuck in first houses” from the Sacramento Bee
The great USA where we can agree to disagree. But when we have to call each other names its sad. I can see both sides of the fence. As for John comment banks where not forced to make the loan but also no forced the home buyer either so tell who crying the most because the house is not worth as much. As for Bruce I feel that is is not my duty to tell to default or not, I can recomend they talk to there accountant on what they can and should do. I as a Realtor weither working with a buyer or seller I am to get them the best deal they can get.
This story was about first time buyers in California right?
As one poster said ‘Sucks bro’. I have a hard time having any pity for anyone who chooses to buy in California. I just move from the Silly CON Valley because I was tired of paying $2K + for an apartment, tired of my daughter not having a backyard, tired of my family not having a home. I just bought my first home in the Denver area. Took my Silly Con salary and bought a 3200 square foot home on a corner lot and my payment is about $100 more per month than my Cali rent was. LOL. The fools in California justifying that market with the sunshine tax need to stop blowing smoke up their own ‘you know what’!
LOL!
I would NEVER buy in that FUBAR state we call California!
(Yes, I do know it snows here so don’t ask!)
The ones who should be prosecuted are the banksters. They have screwed up so bad in the name of greed. Please read up on this and I will recommend a site for you such as Mandelman Matters. All our homes have a debt to pay to someone but most likely it is not the one who the homeowner is paying. The banks got greedy and made short cuts. There are now milllions of Notes that have not be properly documented, assigned & transferred to the end investors so no one knows for sure who has legal standing to foreclose. Homeowners need to understand that if you are foreclosed on the lender that takes the home maybe getting a free home and one day the real owner to the NOTE will show up and demand payment from the foreclosed on homeowner. This is not the fault of the homeowner this is the banks. The only way to deal fairly with this situation is to have the banks work with the homeowners to come to a fair loan modification and then the bank indemnify the homeowner against any future Note Holder who may show up. Anyone who currently owns a home and is paying on time, been foreclosed on or short saled without properly being indemnified could possible face this situation. Also this mess started in July 2007 when the investors figured out that the MBS & CDS they were buying were worthless because of the corner cutting banks so they stopped buying the paper. That is what froze the markets and started this problem. At that time a very small percentage of homeowners were in trouble and that number could not have in anyway caused the mess we are in. As a matter of fact if the entire 1.4 trillion dollars in subprime loans stopped paying it would not be enough to cause this problem. The banks leveraging of the Notes as securities over & over to the tune of $1 of homeowner Note debt to 9 times sold over & over by the banks = fraud and trillions of lost dollars to investors. The homeowners $1.00 was nothing to the trillions sold over & over by our banks. Bank Greed continues to wipe out the middle class who did not have enough clout to come close to starting this mess…but our government is in bed with them and they think we are too stupid to figure it out. Well…it is happening and the more who seek the truth the closer we are to solving the issue.
Thom,
Prosecuted for what?
The bank loaned money, and takes the house if the money is not repaid.
No one forced the banks to make the loans, now they are crying because the houses aren’t worth as much.
TOUGH fot eh banks, they can go crying to their shareholders “waah I repossessed a house but its not worth that mch waaah I thought houses always go up in value”
Stupid bankers.
I don’t understand why some of you are talking about defrauding the bank. California mortgages are contracts with set terms for what happens if a buyer doesn’t pay. There is nothing in there that says “Borrower agrees to pay this mortgage forever despite anything else that may happen.” What it says is “Borrower agrees to pay this mortgage to gain full ownership of the house that is security for the loan. If borrower defaults, bank gets the house.”
That’s what the *contract* says. So how is this defrauding the bank? There are terms for non-payment. So the bank gets stuck with a house worth less than the mortgage. As long as the borrower didn’t refinance, the bank cannot go after the borrower for the difference. There’s nothing immoral about following the terms of a contract and I don’t understand why you’re dragging in charges of moral turpitude and fraud.
The problem is if a borrower has refinanced the loan. Then it’s no longer a purchase money loan and it becomes recourse, the bank CAN sue for the difference. And there are states where all mortgages are recourse, so if you as a borrower are considering strategic default, you had better know what the rules are where you live.
I am with VinceL anyone defrauding a bank should if at all possible be prosecuted IMHO. NO ONE forced any one especially any first-time cry baby or otherwise second-time plus moron to buy anything not one overpriced dump was forced on anyone these fools were either just stupid or throught they were going to make money fast …but as it always does it backfired and now they just don’t want to pay for it. TOUGH. You wanted the dump, they gave you the money AND you took the money to buy it. So play your sob tune offline.