Homeowners are becoming less mobile. The long-term average length of occupancy for homeowners nationwide increased from 12 to 13 years in 2011.

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).

Related articles:

Underwater homes decrease in California

The votes are in: short sales for everyone!

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:

Renting vs. buying: the GRM

Re: Latest Calculations Show Average Buyer Expected to Stay in a Home 13 Years from HousingEconomics.com