The Plight of the "Move-down Buyer"

Stuck in Place

A healthy housing market functions like a gigantic escalator.

The bottom rungs are occupied by first-time Buyers. As they purchase entry-level homes, the Sellers of those homes ("Move-up Buyers") typically buy larger homes, enabling Sellers of those homes to buy even bigger homes.

And so on, and so on.

One of the most remarked consequences of the housing bear market the last three(?) years is that falling real estate prices have clobbered the equity of move-up Buyers.

So, the money they need for a downpayment to buy a bigger home is either diminished -- or gone.

In the most distressed housing markets -- places like Florida and Las Vegas -- many people who bought at the peak are now "underwater" (they owe more than their home is worth) to the tune of tens (or hundreds) of thousands of dollars.

Voila! No more moving escalator.

Stranded at the "Top of the Food Chain"

All of the foregoing is now very-well documented.

Less remarked is the plight of the "move-down Buyer" -- the owner of a bigger home, typically close to retirement age, who is ready for a smaller dwelling, but is unable to sell (also known as a "down-sizer").

If move-down Buyers are lucky, they bought decades ago, and have so much equity that even a 30% drop in housing prices still leaves them able to sell (and they've been prudent enough -- and financially secure enough -- to leave that equity untapped through the years).

It's also true that financial products like reverse mortgages can help move-down Buyers (at least the ones over 62 years old) transition to a smaller home.

However, the flip side of buying a bigger home decades ago is that the same home today could easily require hundreds of thousands of dollars of updating and remodeling to appeal to today's (financially hamstrung) Buyers.

Even if those Buyers can still muster a six-figure downpayment and qualify for a jumbo mortgage, coming up with a couple hundred grand for remodeling, out-of-pocket is (often) the kiss of death.

So what happens?

Nothing.

Move-down Buyers can't sell, which means that the owners of homes at lower price rungs can't sell -- and so on, and so on.

Public Policy Implications

The foregoing dynamic suggests that the best way to unfreeze the housing market isn't to buttress first-time Buyers, as policymakers have done so far.

Rather, the smarter approach is to help move-down Buyers.

That could be done by making a pot of cheap money available to Buyers undertaking major remodeling (cheap purchase money, courtesy of the Fed, doesn't do it); by giving tax credits to Buyers who tackle such projects; or even by giving incentives to investors to buy and remodel such homes.

Such a strategy not only would unlock the housing market's frozen upper brackets, but it would have a huge ripple (multiplier) effect as billions of dollars spent on labor and materials coursed through the economy.

Which all makes eminent, common sense.

After all, as everyone knows, a working escalator needs to go down as well as up.

"Crying Wolf" on Interest Rates?

Still Low (For Now)

For months (years?), Realtors have been warning prospective home Buyers that today's low rates (still around 5% for those with excellent credit) won't last much longer.

That's based on a number of potent economic factors:

--Trillions in economic stimulus pumped into the economy by the Fed and its potentially inflationary impact;

--The dire status of Fannie Mae and Freddie Mac -- the sources of liquidity to the housing market at the moment;

--The withdrawal of both direct (tax incentives) and indirect government support to the housing market (like the Fed's purchase of $1.25 trillion in mortgage-backed securities, which stopped in March).

And yet, mortgage rates have stayed low -- and now, jumbo rates are coming down, too.

You'd certainly guess that by now, many (most?) consumers take perpetually low interest rates for granted.

I'm not forecasting an imminent spike.

But we all know what happens in other markets (like stocks) when investors get complacent . . .

"Rehab Novices"

Why Such a Big Discount For

Big Homes Needing Updating?

Want a novel -- but not at all far-fetched -- (additional) explanation for why so many nicer, bigger homes are facing significant discounts in today's market, especially ones that need significant updating?

Keep reading.

Far and away, there are three big reasons why such homes -- let's just say 4 or 5 Bedrooms, 3-4 Baths, with 3,500 to 4,500 finished square feet, in a nice part of town -- are proving tougher to sell. (Note: the price tag for such a home could be anywhere from $600k-$800k (or more) locally, depending on the particulars).

One. The economy. A rough economy shrinks the number of people who can swing a $5,000 monthly mortgage payment, $10k or so in annual property taxes, and the upkeep on a bigger home.

Oh, and since Buyers of such homes typically need a jumbo mortgage, they'll need to put down $50k or $100k instead of a fraction of that amount needed to buy a home under $500k.

Two. Demographics.

The Baby Boom generation now retiring/downsizing is being followed by a smaller generation with fewer, smaller families.

Ergo, demand is less than supply.

Three. Remodeling costs. You can finance a home purchase with a still-cheap 5%-plus mortgage.

Remodeling costs are typically straight out-of-pocket (remember that little Recession we were just in?).

Rehab Novices

That's probably all the explanation needed to explain why bigger, dated homes are taking longer to sell.

But I think there's actually a fourth reason that goes with the other three.

Namely, the resulting "market compression" makes rehab/updating projects especially daunting for the people who would naturally undertake them.

Here's the logic:

Because of the peculiarities of today's market, it's not unusual to see a completely updated, mint condition home with around 2,500 square feet fetch $500k or more, depending on where it's located.

Meanwhile, some 4,000 square foot-plus homes can be had -- especially if they need significant updating -- for $600k to $700k.

What happens when someone who's outgrown their (otherwise perfect) 2,500 square foot home looks at a 4,500 square foot home that needs "everything?"

It looks overwhelming.

That's especially the case if the biggest remodeling project they've tackled previously is a new bathroom.

Ironically, this "feedback loop" results in bigger homes sitting on the market, which results in discounting, which makes them affordable (at least on paper) to more Buyers moving up from smaller homes . . . who find a big project daunting.

No, I can't prove the foregoing -- but my gut (and my Buyer clients) tells me there's something to it . . .

Counting Down to "The Deadline"

Mortgage Rates: Moving Up

Everyone in the housing business seems to be counting down to the approaching deadline with baited breath.

No, not April 30, when the home buyer tax credits expire.

March 31, when the Federal Reserve stops buying mortgages and mortgage-backed securities -- reportedly, anywhere from $10 to $25 billion, per week, since at least last Fall.

Those purchases act like a huge subsidy, keeping rates down and the mortgage securities market liquid.

The Fed Exits

How big a subsidy?

We're about to find out.

No doubt anticipating the Fed's exit, interest rates have been rising this week; just this Wednesday, according to Edina Mortgage's Lala Brosz, rates on jumbo mortgage re-set four times, from around 5.25% at the beginning of the day, to 5.5% at the end.

The potential updraft in mortgage rates makes it more imperative that prospective Buyers lock in good rates while they're still low (vs. float, in the hopes that they'll drift down).

It may also be a good time to inquire about whether your lender offers a re-lock option, which can be cheap insurance in an environment of rising rates.