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