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
I think Vince is confusing morality with legality. And I think Vince is out to help himself and not others or he would never be in the scummy used housing game to begin with. Also In CA ( where i live) the contrat is pay or quit that’s it. Period. So save us the BS morality crap vince and help people around you make the best desision to help themselves and their famillys ( like you’d even know what that is.) Not your wonky BS morality shtick that really just ends up helping yourself Bankers and the system.
Debt is Slavery
learn a few things here.
http://patrick.net/real/estate.php
Hey, WSCA – why don’t you both read AND comprehend the posts before you go off on your illiterate “I-get-a-new-thought-on-the-subject-about-every-three-minutes” rants, that’s if you CAN read. No one said defaulting was illegal, the discussion was about licensed agents advising clients on a third-party contract (the mortgage) to which the agent had no connection. Read the law, buffoon – when an agent puts themselves out there to a client as an expert on a matter and give advice that the client may take and use as “expert” advice, the agent has opened themselves up to legal liability by giving said “expert” advice. And BTW – I don’t sell homes, not everyone that has a RE license uses it for that, but then again, you are a know-it-all ! It’s about can be expected from someone who is clearly an expert on advice from $5 & $10 hoes. Back to your hole, troll.
…as the morality….it’s like getting a morality pep talk from a $5 h0e
So how much do you charge for bu11shytting people into depreciating homes NO ONE SHOULD BE BUYING now? And for spreading the fictional NAR “statistics”? So please do us a favor, S. T F U.!
…as the morality….it’s like getting a morality pep talk from a $5 h.oe
So how much do you charge for bu.11shytting people into depreciating homes NO ONE SHOULD BE BUYING now? And for spreading the fictional NAR “statistics”? So please do us a favor, STFU!
…as to the “morality…It’s like getting a lecture in morals from a $10 hoe. How much you say you want for bullshytting people into rapidly depreciating homes NO ONE should be buying? So STFU!
F@#$%! Are you people retarded? I am talking to John H, Vince L, Loren S. The contractual obligations you are fererring to have DEFAULT provisions in them! It is NOT ILLEGAL to default, it’s an option and expected outcome DETAILED IN THE CONTRACT ITSELF. You people are mo-rons, but what else could one expect from a Real-tard?
As with most articles posted on this site, the authors are not practicing or experienced realtors or lenders. They’re “media” and that’s it.
This same group published a piece a few months back that basically declared that the American dream of owning a home is a preposterous notion, since home ownership is nothing more than a financial debt trap that no one will ever pay off. Now they’re crying woe to the poor homeowner who wants a bigger house and advising those who have homes with upside-down loans to default and go into that same debt trap they’ll never get out of on a bigger, more burdensome property.
This Bruce character — guys like this are amusing, aren’t they? They’re all for FHA loans with 3.5% down payments to sub-standard credit borrowers, but 6 months down the road when the first-time buyer is upside-down, it’s his opinion that that poor homeowner was hoodwinked by realtors and lenders into buying a home and has some kind of god-given right to walk away from the contractual obligation. I don’t pay attention to idiotic, misinformed, dumbass comments like that. These are the same people who watch infomercials on how to get rich in real estate with no money down. To them, real estate is and should be a risk-free investment with all up-side and no risk to the buyer.
I’ve used this company for my licensing, but when it comes to anything beyond that, this forum is a comedic departure from the everyday grind and that’s it.
People paid more than they can afford for a home. As my kid says, Sucks Bro!
Excuse us, Bruce??? What a moron you are, you should have your sales licensed suspended immediately if not sooner for this at minimum unethical behavior, you aren’t representing a client in the contract they have with their existing mortgage holder and to which you advise them to default, where do you get off giving legal advice to a client for something in which you have no legal or contractual obligation or involvement? You’re only giving them this bogus and illegal advice just to facilitate getting a contract with them. And then you compare defaulting on a mortgage with bankruptcy, which they could avail themselves of but they want it both ways – to not pay the note AND to not have to face any repercussions from doing so.
Vince and Loren obviously forgot who they represent! When a homeowner can no longer afford to feed the beast (bank) because of the bad deal you arranged for them, you claim they have lost their moral compass. The banks and you lost your moral compass way before any borrower has!!! Stop blowing smoke up your clients you know what and get real. If you don’t reccomend “strategic default” to your clients, then you really aren’t representing your client, are you??? What other choices have the underwater homeowner been given? When Donald Trump, Gm, Chrsyler, AIG, or any other number of business entities declares bankruptcy (walking away from millions in debt), you declare them shrewd businessmen. When the lowly first time homebuyer and others try to salvage their American Dream, you declare they are morally lost. Remind your clients never to buy a home from the likes of you two.
I read Vince comments and I agree with him that it is pathetic and sad that we are morally lost.
What was said when I became a Realstate Agent that honesty is the best POLICY. I feel bad for
the realtors that make good honest deals. If this kind of workmanship keep up will we as agents
be trusted in the future.
Wait a minute…are you actually suggesting that “brokers and agents must advise these first-time homeowners and aspiring mid-tier homebuyers to consider….strategically defaulting”? You can not be serious.
It’s time now to stop calling intent to defraud a financial insitution by it’s new name – “strategic default”.
Any licensed agent that gives advice to a client to default on a legally binding contract should have their license revoked and be permanently banned from holding a license in the future. And if the default effects a federally charted bank, they should be banned from practicing in any State.
You ought to be ashamed of yourselves, you have gotten so desparate to make money that you would do and say ANYTHING to get the next deal. I want a better, nicer and bigger car than I have now – should I go buy it and then just stop making payments on the old one and let them repossess it? I want to eat filet mignon for breakfast and caviar for lunch everyday and drink Dom Perignon to wash them down, should I charge up a bunch of it on credit cards and then default on the credit card payments knowing full well they can’t take back what I’ve already had to eat and drink?
This is both pathetic AND sad. If you are unable to make your living in a morally and legally correct manner then get into a different line of work, you’re giving the rest of us a bad name.