No equity, no move-up buyer; no move-up buyer, you get a slow market

Oct 31st, 2011  
by IrvineRenter  in Library News

Astute Observations

Astute Observation by winstongator
2011-10-31 05:18 AM

Waiting 10 years to get 20% equity seems like a losing proposition to me, when if you get a no-down 15 year mortgage, you have 60% equity after 10 years.

What fueled the move-up market of the past was price appreciation.  You had no wage growth from 2000-2010 (even in many of the top-10% fields - engineers aren’t making more, and neither are many medical specialties).  But yet, you had a massive move-up market.  People went after the most house they could get because it was an investment.  If your home was going to go up in price 20% per year, isn’t it better to have a $1Million home than a $500k home? 

Higher selling prices of their prior homes gave the movers-up paper wealth.  Banks allowed much higher DTIs.  You also had more creative financing.  The second and third overcame the requirement for income growth.  Buyers also used their prior paper gains or HELOC income to cover the shortfall.  Was there real income documentation for bubble-area loans in 2005-2007?

Markets that counted on this type of activity will be depressed for more than just two more years.  There was never enough wages in the area to justify the prices, and wages are worse.  Out-of-town money will come in, but they won’t fuel appreciation the way super-leveraged borrowers did.  However, areas that have seen modest wage declines, and modest price climbs & then reversals, will see more paid-in appreciation than they were during the bubble.

Look at the second graph on this post at Calculated Risk.  Even as prices were going up, equity levels were flat, and even falling by 2006.  This showed that no matter how much appreciation fueled equity was being gained, it was being spent either by moving up or HELOCs.  Paid-in equity growth is a better goal for how to get this number back up.

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Astute Observation by octal77
2011-10-31 08:11 AM

...Out-of-town money will come in…

From which towns?  Newport/Irvine metro area is amongst the highest ranking income areas in the USA.

Do you really mean FCB’s?

I have always thought that the FCB was something from mythology.

Real Estate agents I have talked to really like to play to FCB card to create the illusion of demand, knowing that its hard to prove/disprove.

Does anybody have any data to show that FCB’s actually significantly influence the Irvine market?

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Astute Observation by winstongator
2011-10-31 11:17 AM

I don’t know Irvine, but I somewhat know South Florida.  The ‘out-of-town’ money there is Canadian, Latin American and European.  They aren’t so much ‘influencing the market’ as becoming a bigger part of the sales volume.

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Astute Observation by SanJoseRenter
2011-10-31 05:56 AM

> Waiting 10 years to get 20% equity seems like a losing proposition to me, when if you get a no-down 15 year mortgage, you have 60% equity after 10 years.

That’s a lot of assumptions:

- where are these no-down mortgages?
- most Americans opt for 30-year mortgages for affordability, not 15-year mortgages
- if somebody can afford a 15-year mortgage, they can afford to save 20% in 5 years, not 10.

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Astute Observation by winstongator
2011-10-31 07:15 AM

That was an example.  There are lots of 5-10% down programs, in addition to FHA/VA loans.

None of those assumptions are on the order of magnitude of assuming that prices will rise again.  They are also less damaging to our overall economy.  The assumption that home prices would never fall in a significant fashion is one of the most damaging assumptions of the past 25 years.  Right up there with the ‘Iraq’s oil revenues will pay for our invasion, so our total cost would be $50-$60 Billion (only off by 40X or so).

Prior activities of Americans in the housing market have been terrible.  Moving to 15 year mortgages from 30yr loans would be an improvement.  Defending something by saying this is how people have done it, when there is financial disaster still visible in the rear view mirror (and somewhat out the side windows), is extremely weak.

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Astute Observation by Casual Observer
2011-10-31 03:36 PM

Sure there are lots of low-down loans, but most of them now will not be applicapable to most areas of California.  And the added monthly costs of Mello-Roos and HOA’s will tip most folks out of the “qualified” bucket.  So, then where are you?  You can’t have it both ways.  Substantial downpayments, clean credit, adequate income to buy product that is vastly overpriced even at bank auction levels.  The bottom line is, how far down do prices have to get for real folks to get back into the market?  I’m not talking about those foreign buyers that have $500K and will get a “Visa” if they purchase.  That’s just another bandaid.  The market needs REAL buyers.

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Astute Observation by winstongator
2011-10-31 04:11 PM

This post was about how move-up buyers require equity, and my point was that appreciation fueled equity is not going to be there - at least short-term.  The other ‘requirement’ for move-up buyers, increasing salaries, was never there with the most recent group of move-up buyers.

The better way to look at gaining equity is through paying down your mortgage - either through 15 year vs 30 year terms, or extra payments (15 year terms are in a way better than extra payments because they get you lower rates). 

When you look at income-generated equity vs. price-appreciation generated equity, you see different futures playing out.  If you have people buying today expecting to sell in 5 years for 25% more than they bought, you get one group of buyers.  If you have people expecting prices to be flat, but either saving for a DP or tolerating more paid in each month towards the mortgage, you get different buyers.

Prices will go to where the payments take them, without much appreciation going forward.  I don’t see that being upwards.

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Astute Observation by HydroCabron
2011-10-31 07:02 PM

“How bad does it have to get before this administration wakes up and seriously tackles this housing catastrophe? Without bold action, millions of more families will lose their homes and our economy will continue to stall. If this administration continues to stick its head in the sand and wait for the housing crisis to run its course, I am afraid the president could end up losing his current residence in 2012.”

- Mitt Romney, October 24, 2011

Oh, well.

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Astute Observation by flyovercountry
2011-11-01 07:24 AM

I guess reality didn’t poll well.

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