Not so long ago, when prices were plummeting and foreclosures pumped up the inventory counts with discounted values, homeowners and real estate professionals would have welcomed one of the chronic problems plaguing markets today; inventories so low that they inflate prices and keep move up buyers in homes they want to leave.
The question everyone is asking: “What’s happened to supply and demand dynamics? Demand is stronger, so where’s the supply/”
Recently the California Association of Realtors released a study that answered that question what another one. About 35 percent of homeowners surveyed by the CAR said they have considered selling their home in the past year. But among that group, 64 percent said they decided against it because they couldn’t afford the home they’d like to buy as a replacement. So move up sellers are caught in the same circular trap as first-time buyers. Where are the affordable listings that will halt this merry-go-round?
In 2013, when tight inventories switched from being a national blessing to a curse, Zillow’s Stan Humphries provided an explanation at the National Association of Real Editors’ annual meeting and the scales fell from my eyes. He outlined how deficient equitied owners were frozen in place—not just those under water but also those lacking the 20 percent positive equity necessary to sell. When you added up the under watered and the under equitied, it was a huge chunk of all homeowners with a mortgage at that time.
Less than 20 percent of homes today are under-equitied or under water
Price appreciation has whittled down that number over the past two years. RealtyTrac recently reported that only about 13.3 percent of all properties with a mortgage have less than 25 percent positive equity. CoreLogic puts the percentage of underwater and homes with less than 20 percent equity at 19.4 percent of all homes with a mortgage. Zillow puts the negative equity rate at less than 15 percent through the second quarter.
Still a big factor, the equity barrier hurts some markets more than others. It is worse in those markets that suffered most in the housing crash—the ‘sand’ states of California, Arizona, Nevada and Florida. It is also higher among entry level and mid-level price tiers than the top levels.
But is it possible that the barriers facing move up buyers are a lot greater than just adequate equity? When you think about what it takes to move today from the home seller’s point of view, does the 20 or 25 percent positive equity really provide enough to get out of the old house and into a new one? To buy a new one at at the same price, not to mention a larger one a growing family might need, today’s down payment rates eat up half of the 20 to 25 percent positive equity realized by the house being sold. Yet that’s just the start of what it takes to move up.
There’s a bigger expense that the economists are overlooking but it is front and center for every home owner thinking of selling.
During the trough of the housing depression following the crash in 2007, home improvement spending by homeowners fell 13 percent from peak to trough. Basic maintenance work hardly dipped but homeowners halted all the discretionary projects that they could put off—building out the basement, adding a deck, upgrading HVAC or heating systems, putting in energy saving windows.
This belt-tightening lasted a lot longer than the Great Recession. By 2013, home improvement outlays per owner were only about $2500 a year in 2013 compared to $3400 in 2007, according to the Harvard Joint Center for Housing Studies.
Survey of Remodeling Contractors, Q1 2015
Postponed projects are the greatest source of new business for remodeling contractors.
Source: Home Improvement Research Institute
“In general, lower household mobility reduces remodeling demand because households tend to spend more on improvements both when they are putting their homes on the market and during the first several years after purchase. According to a 2014 Home Improvement Research Institute survey, fully half of recent sellers (who had sold and purchased homes in the preceding three years) undertook one or more improvement projects to prepare their homes for sale, with their expenditures averaging well over $8,000,” said the Joint Center in its most recent report on the remodeling market.
A new tipping point
Beyond equity, a second barrier keeping move up buyers from moving on up is the cost of getting their homes ready for the market, a cost that has increased substantially in many cases because homeowners find themselves playing catch up on repair and remodeling projects that were put off during the lean years.
With the median price of a home around $200,000 today, that $8000 is 4 percent of its total value. Add the brokerage commission and a 10 percent down payment on a new home at the same price and before you add all the other costs associated with selling, buying and moving, you have reached the 20 percent barrier of positive equity that separates homeowners from the negative equity category where they are considered to be lacking unable to move up.
It’s quite possible that prospective move up buyers are paying the piper for delaying improvements necessary to make their homes sale-ready. The cost of these could be a tipping point point that is keeping them off the market for another year or even more despite today’s favorable price picture.