Time to take a look at the second installment in the 7 things series. If you recall, last time, we looked at the fact that, in a rapidly changing market like we are, 6 months ago is ancient history. What someone paid 6 months ago…… Well, just read about that at 7 Things – Part 1.
So what’s Part 2 about? Here’s what I wrote last time:
2. Don’t worry so much about what you paid for your house. Instead, look at the difference between what you can expect to sell your house for and what it’s going to cost you to buy the new one that you want. I expect you’ll find that those are much more important numbers (unless you end up without any equity, in which case you don’t sell).
There are a couple of things that I think still hold true and one big thing that I think doesn’t hold true any more. First the things that hold true:
- If you are selling one home to buy another, the most important number is not what you paid for the existing home, the most important number is the difference between the two homes. If the value of your home has fallen by $40,000 but you’re in a situation where you can buy a newer home with less maintenance and 1000 square foot bigger for a “net” difference of $20,000, then it might very well be a good deal.
- If your family situation has changed (i.e. – We got married and are expecting our second set of twins in the last 2 years! – Yikes!) then what you paid for your house doesn’t matter. I’ve got a client who is negotiating on a house where the seller has to sell within the next three weeks but they are “hung up” on what they paid for the house. If you need to do something, don’t worry about what you paid for your house, just focus on what the financial and logistical aspects and make the move. I’m working with a client who is relocating for a new job. His new position is a nice enough “step up” from his current position that they sold their home for approximately 20% less than they paid for it and still be able to buy a new house. He told me that while he didn’t want to sell his house for less, the overall picture of the move is “the right thing” for them at that point.
Now, the one big thing that has changed since last year. Let me lay it out this way:
- On March 4, 2009, Bloomberg reported that More than 8.3 Million Home Owners were underwater.
- On October 20, 2009, I was on a conference call where Dr. Nouriel Roubini said that if housing prices drop another 7 to 10% over the course of the next year, by the end of 2010, there will be 25 million home owners who are under water. Oh and he said that it’s almost guaranteed that they will drop because of the imbalance between supply and demand. There already is too much inventory, credit is still tightening, foreclosures are still climbing and jobs are still getting eliminated. That means the inventory problems aren’t going to go away any time soon.
Let me make that perfectly clear. There are approximately 51 million home owners in the United States who have mortgages on their homes. By the end of 2010, almost half of them will owe more on their homes than what they are worth.
If you’re sitting in a coffee shop reading this on your laptop, look at the guy at the table next to you. Now look at the guy on the other side. 1 out of the 2 of them owes more on his house than what it’s worth. Ouch.
That means a number of things that are different than last time:
- There will be sustained upward pressure on foreclosures.
- There will be marked lack of geographic mobility. A lot of people who would consider and/or actually relocate to get a job/a better job won’t be able to because they can’t sell their house. Or they’ll relocate, give the old house back to the bank (lots of credit ramifications – topic for some other time) and rent.
- Over the years, the “old rule of thumb” was that the average home owner would move every 7 years. Now with almost 50% of the homeowning population “trapped” in their homes, we’re going to see people staying in their homes a LOT longer and we’re going to see a lot less move up buyers, a lot less move “over” buyers and a lot less downsize buyers. That’s going to accentuate the inventory problems and keep downward pressure on house prices.
- That also means that there will be a lot less opportunities for builders, Realtors and lenders because of the decreasing mobility of the American population.
So, on the one hand, things are similar to what they were last year in that if you are going to make a move, what you paid for your house isn’t that important, it’s the difference that matters. But, for more and more people, the changes in the market since last year mean that if they want to move, they have no good options. They can stay put or they can do the short sale/foreclosure/rent for a long time option.
The market is different than it was in the summer of 2008.
Tom Vanderwell
P.S. Stay tuned for Part 3 – Is this the market for Do It Yourselfers?
Robert Worthington says:
Hey Tom, great way to overcome objections by explaining its the difference that matters, not what a customer paid for it.
October 26, 2009 — 9:56 am
Julia Odom says:
I hate hearing some of these statistics, not just because they are bad news but also because I’m not sure who they apply to. Around here (Chattanooga, TN) we never really had a run up in appreciation except in a very select few suddenly hip areas. I daresay that those who bought in the last 2-3 years around here might be slightly underwater but that’s certainly not half the homeowners in my area. I’m wondering how just how bad it must be in certain pockets – the usual suspects of FL, NV, CA, MI – that makes those stats true.
October 26, 2009 — 2:24 pm
Dave Shafer says:
Hey Tom, some good stuff here.
But I don’t believe half of home owners will be underwater soon. Not even close to that even here in Florida.
Real Estate has, of late, been based on perceived need not actual need. You really don’t need 2800 sq. feet even if you do have 4 kids!
If one were in a rational mind [I know most people aren’t] then an asset allocation model would be appropriate. Would your home equity [I know you don’t think anyone has any left] be better put to use somewhere else? Or in another type of investment?, I could easily rent for less than what I pay for my mortgage + taxes + insurance and move my equity [yes I have equity] to someplace that might have a better chance of appreciating over the next couple years. But, I don’t [emotions of loving my house and my neighborhood and my neighbors and my life style].
I bet most people are like me and just hunkering down appreciating what we have left [including our aforementioned house,neighborhood, etc.]
So the real question is when and if perceived need is reingnited. My bet is yes, but not for a year or more.
October 26, 2009 — 2:52 pm
Tom Vanderwell says:
Julia – According to Zillow’s market report, 58 metropolitan areas have experienced an average return of negative 2% or worse. That puts over 1/3 of the metropolitan areas in a situation where someone who put 10% down (or less) in the last 5 years is at or below water level.
In Michigan (my neck of the woods), the number of underwater borrowers has been over 45% for at least 6 to 9 months already and it’s anticipated to get worse.
David – you highlighted exactly what I’m trying to bring up. Due to the amount of people who are underwater (and it might be 70% in California and Arizona and only 20% near you) but whatever the amount is, it’s going to impact people’s thinking and their decision making about real estate.
I think that “hunkering down” is a pretty good description of what I’m seeing and hearing as well.
Tom
October 26, 2009 — 5:24 pm
Sean Purcell says:
Real estate is local my friend…
October 26, 2009 — 6:18 pm
Tom Vanderwell says:
Sean,
Good to hear from you again. You’re right. Real estate is local. But guess what, the same principles apply whether the real estate is in Yorba Linda or Rockford Michigan. The percentages might and do differ, but the principles still apply.
Oh, and guess what – the world of mortgage financing isn’t local. The same rules apply all over the country.
Tom
October 26, 2009 — 7:00 pm
mike mcc says:
I wouldn’t worry much about late payments, foreclosures or deed in lieu of foreclosure wrecking your credit too much. We saw a lot of that in the 1980’s, and far more of it today.
Lenders will approve buyers who are stable for 2 or 3 years. Relocation? You have a good job opportunity in Boston, but you won’t move from Phoenix because your house is underwater? Ridiculous. Just make the move.
The “new” economics clearly are not working. It’s time to go back and lean on Congress to support middle America and give everyone an opportunity to have a $15,000 tax credit for buying a home, investment or otherwise. Johnny Isakkson ain’t no dumb bunny.
October 26, 2009 — 11:40 pm
James Boyer says:
Yes real estate is local. To that, I will add that even here in Morris County New Jersey, where it has not been unusual for buyers to put down 20% to 50% when buying a home, the number of homes on the market and the number of homes selling has dropped about 20% from last year. Last years sales volume was already down 10% from the year before. Lots of people hunkering down. Can it continue around here?? Probably, but there are many many older people around here who are getting close to the point where they cannot handle their homes anymore and new rentals are not exactly flying onto the market ether.
October 27, 2009 — 7:26 am
Ken Flaspohler says:
I agree with your words about not worrying about what you will sell for, in this market the better question is how much can you buy for. Look for the bargains and you will come out ahead.
October 28, 2009 — 5:05 am
Troy Chowanec says:
Excellent article. I agree that what one paid for a house may not be important in the overall plan. All too often a seller gets hung up on a sale price only to loose sight of the trade off that will ultimately be in their favor. As far as what will happen in 2010 time will tell. I am currently on the fence. You could be right.
October 28, 2009 — 9:12 am
Ashlee says:
Lots of good information. Def. a good read that should be printed and read often!
October 28, 2009 — 7:07 pm
Sue Zanzonico says:
I agree that is the healthy way to look at it in this real estate market. I have some sellers that are unfortunately still hanging on the prices of ‘yesteryear’. They seem to think that they are exempt from what is going on in the market.
October 31, 2009 — 5:49 pm