Jan282016

Many homeowners downsize when released from their bubble-era debtor’s prison

After enduring 10 years of excessive mortgage debt service, many people downsize when prices rise high enough for them to sell.

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Most people visualize the housing ladder as a steady upward progression from starter home to Mansion by the beach, but that’s seldom the reality. Many people buy entry-level housing, and when prices rise high enough for them to sell and have 20% down for a larger property, the participate in the move-up market. If their income grew while they lived in their entry-level home, the step up can be quite luxurious. If their income didn’t go up much, they are probably better off refinancing into a lower-cost mortgage and staying put.

The housing bubble severely disrupted the housing market. It prompted many people to buy into a market frenzy and many others to refinance their homes at peak price levels. As a result, many people were trapped beneath their debts when house prices crashed. (See: Millions of homeowners trapped in entry-level homes for over a decade)loan-modification-rescinded

Many of those who bought or refinanced at the peak used unstable loan products, and they couldn’t afford to service the amount they borrowed. In an act of self-preservation, lenders often modified these loans to make the debt service manageable, but it didn’t make the debt — or the house — truly affordable. In 2013 I posited that the Loan modification entitlement will be rescinded as prices near the peak, and later that The final resolution of loan modifications will push people out of their homes.

The people affected by the rising costs of their loan modifications will not likely end up as foreclosures. The banks wait to put the screws to people until after they have equity and the homeowner can sell for enough to repay the bank; after all, the bank doesn’t want to lose money. This slow exodus won’t impact prices in the housing market much, but it does impact the lives of many families as they are subtly pushed out of their homes. After years of struggle, many of these people will take a step down the property ladder into a house they can truly afford.

long beach owners

After years of bubble and bust, the housing market is ‘normalizing’

“Housing is normalizing, which means prices are increasing within an acceptable range,” Adibi said. “It’s good news to everybody. … Volatility is not healthy. For nobody.”

Jeff Collins, Jan. 24, 2016American_dream_the_money_pit

Their daughters off to college, Rick and Tami Moscoso no longer needed their 3,400-square-foot “money pit” of a house in Mission Viejo’s gated Canyon Crest community. …

So they decided 2015 was the year to downsize. …

A Rancho Santa Margarita couple’s decision to move from a condo to a house last summer may be illustrative of the 2015 market. …

They sold the house for $950,000, then bought another one for $560,000.

“It served its purpose while we had (all our) kids at home,” Rick Moscoso, a real estate photographer and videographer, said of the house. But it was “lots of maintenance, lots of house to take care of. It really was time for us to just downsize and simplify.”

Purging belongings and moving into a home a third the size of their old one was a nightmare, but worth the effort, Moscoso said.

We were trapped by this money pit,” he said.

We wanted to invest in us.

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I give this family credit for finally making the right financial decision. The discussions about selling their dream home to take a step down the property ladder could not have been easy, but it was clearly the right choice. They cut their housing costs significantly, and now they will have the extra money to do all the things they gave up to own that huge home loan.

Many others will choose to hang on because the moment they rise above water, the stress of being a loanowner almost immediately turns to greed about making enough money to buy a nice move-up. Unfortunately for them, many others will not keep enduring the high monthly payments when they emerge, and these newly-equitied owners will get out as soon as they can and execute a move-down trade. These new listings and move-down trades will pressure higher price points and create more demand at lower ones.

Real Estate Seminar Thursday February 4

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