Did the housing bust change homebuyer attitudes and expectations?
In 2005 a house was an investment you could live in. A house was expected to provide endless rapid appreciation that could be converted to spending money at any time. Debt on the house could always be increased yet refinanced at lower and lower rates and better and better terms so payments wouldn’t go up. Further, the owner would never actually have to repay the debt as the house was expected to cover all debts when it sold. With such blissful and fallacious thinking, a housing bubble was inevitable.
The housing bust revealed nearly every homeowner belief and attitude was a fantasy. House prices did not always increase rapidly. In fact, they could decline rapidly as well. The debt could not always be increased and refinanced, and the payments did go up. The owner is responsible for the debt unless the lender agrees to take less in a short sale or doesn’t bother to pursue a deficiency in a foreclosure. Homeowners learned the hard way there is no free house.
Over the last six and a half years of writing daily posts, I’ve tried to educate everyone I could reach on the danger of these fallacies, but I can only reach so many, and even some of those I do reach would rather believe the fantasy than accept a less appealing reality.
Today’s featured article appealed to me because it postulates something I want to believe. I want to believe people really have learned. I want to believe my writing is not wasted time and that I do impact people’s lives. So perhaps I have lined up for my own reassuring lie that homebuyers have changed their attitudes and beliefs about house. You tell me. Has anything changed?
Amy Hoak’s Home Economics — Oct. 28, 2013, 6:00 a.m. EDT
When Amy Lewis sits in her Lafayette, Calif., home, she can envision her three young daughters growing up there. She sees them forming lasting friendships with the neighborhood kids, graduating from the local schools, coming home for visits during college breaks.
It doesn’t stop there: The 43-year-old can also imagine grandchildren running around the halls.
Most people who by detached houses believe it is their “forever house.” Of course, it rarely turns out that way, but nearly every buyer approaches their decision with that mindset unless they are buying a property they know is unsuited for their family because they feel the need to “own” something.
It’s a different mentality than in years past, when people would buy a home, stay for several years and move up to something bigger or better.
First and foremost, Lewis said she and her husband wanted an experience similar to one that they had growing up, one where the neighborhood kids went from preschool to high school together. Her parents still live in the same house they moved to when she was 2 years old (and they’re also flush with home equity in their 80s).
If they are flush with home equity, then they resisted every temptation to blow it. They were undoubtedly offered HELOCs and reverse mortgages, and every other free money goodie a mortgage broker could think of to entice them to their own destruction.
But Lewis adds there is another financial reason to staying put: Mortgage rates are very low, and there is a good chance it will be hard to trade in that monthly payment in several years.
Stop for a moment and think about the implications of that. First, rising interest rates will also make loan balances get smaller with the same payment. Unless incomes rise faster than interest rates, loan balances will not continue to grow, and home prices will stagnate (which is what I believe will happen). Further, the refinancing rage of the last 30 years is over, probably for the rest of our lives — or at least another 30 years depending on how old you are. The last time interest rates bottomed out after World War II, it took 30 years of struggling with increasing interest rates and inflation before Paul Volcker raised rates dramatically and reset the interest rate cycle so Alan Greenspan could enjoy 25 years of falling rates to stimulate the economy. In all likelihood, interest rates will rise slowly for a very long time.
“Definitely, for the next 30 years, we feel confident we want to be there,” Lewis said.
I’ve always made long-term plans, but as I’ve gotten older I’ve also realized it’s very difficult to be sure what you will be doing or where you will be living even three years hence. The idea that you can count on living in the same house for 30 years is a bit fanciful, don’t you think?
More home buyers today are planting deep roots in their communities, according to research from the National Association of Realtors. That’s especially true for buyers younger than 45 years old—those most likely to be move-up buyers, said Paul Bishop, NAR’s vice president of research.
In 2012, 27% of home buyers between the ages of 25 and 44 and 18% of buyers between the ages of 18 and 24 said that they planned to be in their homes for 16 years or longer, according to a NAR survey of 8,501 home buyers. In a comparable survey in 2006, 18% of buyers between the ages of 25 and 44 and 8% of buyers between the ages of 18 and 24 said the same.
Expectations have adjusted, and trading up is no longer the goal for many, Bishop said. People became accustomed to the move-up mentality when they’d see their neighbors move for extra square footage or a more desirable area. Now, your neighbors probably aren’t going anywhere.
“[Buying a home] is a very complex procedure—much, much more than before,” said Sherry Chris, chief executive of Better Homes and Gardens Real Estate, a national real-estate brand. “People are in it for the long haul, and it’s not just ‘I’m going to buy a house and see what happens in a few years.’”
Added Cara Ameer, broker associate with Coldwell Banker Vanguard Realty in Ponte Vedra, Fla.: “A lot of people tend now to think more logically than irrationally. They are really scrutinizing ‘do I need this?’ They’re looking at hard costs, and not throwing caution to the wind.”
I hope people really are carefully considering the costs when looking at home purchases. The main reason I’ve invested in the new website upgrade is to provide this cost of ownership information on every property on the MLS to aid people in making this decision.
For many homeowners, it is a matter of simple math, said Jeff Taylor, co-founder of Digital Risk, a mortgage processor. Today’s buyers are capturing mortgage rates near historic lows—and that’s allowing them to get “double the house” today compared with what they could get several years ago.
LOL! It is simple math. It explains why the central bank lowered interest rates and sought to drive mortgage rates down to record lows. In 2006, houses were overvalued by double. Now, with lower interest rates, people can finance the crazy prices of the bubble era peak. Remember the chart below from yesterday’s post? House prices today are nearly back to the peak, yet now they appear fairly valued whereas in 2006 they were grossly overvalued. That’s the simple math behind lower rates.
The monthly payment on a $300,000 mortgage for a home bought in 2005 at a 7% rate is roughly equivalent to a payment on a $600,000 mortgage obtained in 2013 at a 3.5% rate, he said.
As I mentioned above, the $300,000 house in 2005 is not equivalent to a $600,000 house today.
These buyers may never even have the desire to refinance in the years ahead, since doing so would likely increase their rate. The Mortgage Bankers Association predicts rates on the 30-year fixed-rate mortgage will rise to 4.8% in the fourth quarter of 2013, and to 5.1% in the fourth quarter of 2014. A decade from now, a mortgage obtained this year will likely look very reasonable, Taylor said, compared with what’s available in the future market.
More simple math…
What’s more, these days home values don’t appreciate at the same rate they did seven, eight or nine years ago, Ameer said. So people don’t plan on their home appreciating by $100,000 in two years, giving them the equity to move up to a bigger home.
Actually, homes have appreciated quite significantly over the last 18 months, but they shouldn’t appreciate nearly as much going forward. In fact, the long-term rate of appreciation should be far less than the average of the last 25 years due to rising rates and stagnant wages.
Further, the idea that a house appreciating $100,000 does not provide equity for a move up because the move-up house has also appreciated in value by the same amount. The only way people make a true move up is if they make more money and can afford to significantly increase the balance of their mortgage loan.
That said, “as you’re paying that [mortgage] down and home prices appreciate, 10 to 15 years down the road, that equity will build,” Taylor said. “We’re going to see the home being the nest egg.”
This is certainly what I want to believe, but will it really work out that way? Will HELOC abuse be as prevalent this time around? I certainly hope not, and rising interest rates will make HELOC debt much less appealing, but will people really stop raiding their nest egg? Again, I have my doubts.
Of course, some homeowners will be tempted to tap their equity during their tenure in the home. For that, those who buy today are more likely to turn to home-equity loans instead of cash-out refinancing, so as to keep their low mortgage rates, Taylor added.
Seeing into the future
The tricky part about buying a home to live in for decades is anticipating your needs at different points of your life. Most importantly, make sure you’re buying in a prime location. A good school district might be important to you, or walkability to public transportation or shopping.
“Every area has those little places where no one moves. It can’t be replicated anywhere else,” whether the appeal is a good school district or highly sought after neighborhood amenities, Ameer said. Typically, “these areas are the best for that, for staying for a longer period of time.”
For Amy Lewis and family, their new neighborhood hits many of those points. In addition to good schools, there are many restaurants, mom-and-pop stores and ideal weather (without the kind of fog that nearby San Francisco gets). In fact, Lafayette almost feels like a “mini San Francisco,” she said.
“I grew up about 40 minutes from here, and it has a similar feel,” she said. “This is a perfect location.”
Many people like Irvine for the reasons listed above. There are few if any neighborhoods that people wouldn’t want to live in for the long term. Let’s hope the new breed of homeowners in Irvine won’t spend their homes like the ones who just moved out.
9312 ROYAL PALM Blvd Garden Grove, CA 92841
$1,399,900 …….. Asking Price
$620,000 ………. Purchase Price
5/1/2002 ………. Purchase Date
$779,900 ………. Gross Gain (Loss)
($111,992) ………… Commissions and Costs at 8%
$667,908 ………. Net Gain (Loss)
125.8% ………. Gross Percent Change
107.7% ………. Net Percent Change
7.0% ………… Annual Appreciation
Cost of Home Ownership
$1,399,900 …….. Asking Price
$279,980 ………… 20% Down Conventional
4.65% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,119,920 …….. Mortgage
$283,417 ………. Income Requirement
$5,775 ………… Monthly Mortgage Payment
$1,213 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$292 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$42 ………… Homeowners Association Fees
$7,322 ………. Monthly Cash Outlays
($1,757) ………. Tax Savings
($1,435) ………. Principal Amortization
$490 ………….. Opportunity Cost of Down Payment
$195 ………….. Maintenance and Replacement Reserves
$4,814 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$15,499 ………… Furnishing and Move-In Costs at 1% + $1,500
$15,499 ………… Closing Costs at 1% + $1,500
$11,199 ………… Interest Points at 1%
$279,980 ………… Down Payment
$322,177 ………. Total Cash Costs
$73,700 ………. Emergency Cash Reserves
$395,877 ………. Total Savings Needed