Homeowners who sold in 2011 were in their homes an average of 16 years. The average length of occupancy was shortest in 2005 at 10 years, and longest in 2009 at 20 years.
First-time homebuyers tend to move out of their starter homes sooner than trade-up homebuyers. First-time homebuyers move after an average of 11.5 years, while trade-up buyers move after 15 years.
first tuesday insight
Little wonder mobility has been lost. Detrimentally, mobility has been severely hampered in the years when one most needs to be able to move on to a new job.
Most Californians who purchased or refinanced during the Millennium Boom now find themselves underwater in a sea of negative equity — around 2 million of them (about a quarter of the state for perspective). These owners cannot move without taking a loss, essentially having become economic tenants who are imprisoned in their own homes with little chance of financial gain.
However, the long-term mobility estimate of 13 years is far too optimistic for the recovery years ahead.
Those who purchased or refinanced at the height of the Boom and have not defaulted by now have a long way to go before they will surface from negative equity. Considering mortgage amortization combined with long-term price appreciation (which increases at an average annual rate of 3%, anchored to the rate of consumer inflation), these homeowners will likely see daylight around 2020-2025.
Thus, Millennium Boom purchasers will ultimately have to stay put for 15-20 years before relocating is a financial possibility. If only it were as brief as 13…
However, there is another breed of negative equity owner. This includes those who purchased not at the peak, but at the inflated prices of 2009-2010 resulting from the first-time homebuyer tax credit.
Prices have dropped since then, leaving these owners with a smaller amount of negative equity today. They are less underwater than those who purchased before the bubble burst, but their mobility is still hindered by mortgage balances disproportionate to property values (unless they purchased with a decent down payment).
What other options exist for those who wish to move?
Underwater homeowners might consider renting out their residence. This will prove attractive to those with only a small measure of negative equity, such as those who purchased in 2010 or were able to refinance excess mortgages at current low rates.
However, even with today’s increased competition for rentals, the rental payments received will not likely cover the overblown mortgage payments of those who purchased during the Boom. This is particularly true once you include taxes, insurance, maintenance and any homeowners’ association (HOA) fees.
A negative equity owner could also:
- convince the lender to complete a short sale; or
- simply walk away (read: strategic default).
Either of these choices will require the former owner to rent for a couple years and save up a 20% down payment before qualifying for another home loan.
Still, two or three years for a fresh start is preferable to 15-20 years of restricted mobility (and lender subsidy).
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Agent advice
Some good news for agents: you don’t need to wait passively for the odd positive equity seller to come along. Encourage underwater owners to consider their options — despite their negative equity status, they do not need to acquiesce to house arrest.
If your local community is weighed down with immobile, underwater owners, consider broadening your horizons. Look up local and nearby mobility rates from the U.S. Census and focus your FARMing efforts in the areas with the highest turnover rates. Those who are mobile generate sales (and fees).
You can also use the gross revenue multiplier (GRM) to encourage underwater owners to consider the savings to be had by a strategic default and renting a comparable home. You can calculate the GRM by dividing the sales price by the annual rent it (or comparable properties) would fetch.
Dollars talk.
Related article:
Re: Latest Calculations Show Average Buyer Expected to Stay in a Home 13 Years from HousingEconomics.com
Geez First Tuesday… you folks always have interesting points of view but I think you are taking this line of thinking to the end of the gangplank and beyond.
You have had some valuable insights into the “black hole asset” and “in any family, the breadwinner is too big to fail” ideas, but you are going too far now. You are encouraging real estate agents to take a very predatory, aggressive marketing stance to increase their own share of the commission pie at the expense of families who may (or may not) be struggling to find the best solution for themselves.
Most insolvent buyers have made their choices and have moved on. Many people aren’t under “house arrest”… they have a place to live and might have found that the few extra hundred dollars in mortgage payment due to negative or break even values is more than offset by the fact that they can stay in their home. After all, these are HOMES, not stocks or other non-emotional assets. Maybe they don’t want to rent and be at the mercy of rent increases. Maybe their credit and the commitment to paying back a loan they agreed to is something they value. Maybe their children or job require that they stay in their homes in a particular geographic area. Walking away from a slight negative equity might have more repercussions– a smaller house in a worse neighborhood, different length of commute, different school district, etc. And, of course, avoiding ruined credit is important to many people, too. With a good, low interest refinance (if possible now or soon), mortgages are actually cheaper than rents in many areas. The forecasted difference between 13 and 15 years is simply not that great (a toddler from this imprisoned household will be driving by then, or driving and graduating) as to be something to get analysts kickers in a wad.
In case you haven’t noticed, the real estate market is in the middle of a rebound. Starter homes are nearly impossible to buy in many So. Cal areas. What is your suggestion for these “millions” under “house arrest?” They’ve got to live somewhere, so why don’t you tell what their next step should be, next week, next month and next year after they’ve walked away from their HOME, rented a house in gosh knows where, and have to wait several years to scrape together a down payment and rebuild their credit enough to own another home. And let’s not forget the damage to any given neighborhood when it transitions from mostly home owners to mostly rentals… surely that will slow the recovery, too, eh?
Really? Now we’re encouraging solvent homeowners to short sell? Where’s the morality in that? A mortgage loan is a promise to pay. A promise is a promise! The Bible has allowances for people who experience insurmountable hardships — it’s called bankruptcy. I do short sales for people who absolutely can’t keep up their payments — exactly like bankruptcy is supposed to be. A commitment is a commitment, whether it’s financial, employment, marriage, parenting. It may get difficult, but you do your best to keep going. I can’t see that encouraging people to break their word will help build a stronger real estate market, or America.
This is becoming a vicious circle. Some homeowners will win others will lose. The big money days of turning a home over and investing your equity into another property are lost.
I think your inflation assumptions are likely to be proven very wrong. The NOMINAL price of homes will be driven back up to where homeowners are no longer under water, as soon as the flood of printed-from-thin-air Fed money begins to circulate.