Stranded move-up buyers are watching for the tide to rise. (Photo: iStockphoto)
Anyone who has been looking to buy an entry-level house can likely share stories of losing the battle in a war of multiple bids. Outside of a few hardest hit areas, the entry-level market is nothing if not robust.
A big reason is the pent-up demand that was created by quickly appreciating home prices. Although homeowners cheered when the price of their home increased, there were many others who groaned, knowing that home ownership was that much farther from their grasp.
Few move-up buyers
So although the entry-level market has seen great demand from investors and first-time buyers, the move-up market is stagnant. In a normal market, entry-level buyers would allow those sellers to move up to a more expensive house.
But not this time, because the entry-level market consists of too many foreclosures and short sales. The previous owners of foreclosures are now renting. The same goes for those who negotiate a short sale.
The National Association of Realtors is set to release its annual consumer study, which it says will show that 45 percent of home sales during the past year were to first-time buyers. If you include investors, the numbers would show not too many people looking to move up.
“We’re getting early indications of price stabilization, but we need a steady supply of qualified buyers to meaningfully bring inventories down and return us to a period of normal, steady price growth,” NAR economist Lawrence Yun said.
The key to this statement is “a steady supply of qualified buyers.” Right now, the stream is running out of water before it can get to the move-up buyer.
The big problem is that most people are not willing to sell their home at a loss or small profit if they don’t have to. Many Americans have most of their wealth tied up in their home and don’t have the cash for a down payment on a move-up house unless they can pull it out in equity. This is how it works in a normal market.
In the mid-1990s my company was moving our division 120 miles. I told my boss this would be a hardship because the value of our house had fallen about $100,000 since we purchased it. His enlightened comment was: “Yeah, but all the other houses have fallen in value, too.”
Of course, he wasn’t considering that I would need to have a down payment for another house and in the current market, I would walk away with zero — if I was lucky.
That’s the conundrum for many owners today. You don’t think they are eyeing that sweet house on a bit more land and in a little nicer area? But, really, there’s no way for them to get there. Until there is, the real estate market is going to remain robust at the entry-level and dead in the water anywhere above that.
Releasing demand
So what needs to happen to release the pent-up demand of the move-up class? Time and some luck.
Although first-time buyers are in many cases taking residence in an empty house, they will, in five-to-six years by historical standards, become move-up buyers. Many of those displaced by a foreclosure or short sale will someday return to homeownership.
This demand will lead to increased prices at the entry-level, allowing more of those sellers to move up.
One good sign is the dropping inventory. NAR statistics show that the national housing inventory fell to a 7.8-month supply of homes in September, down from a 9.3-month supply in August. This is the lowest level in two-and-a-half years according to the NAR. Generally, a six-month supply is considered a balanced market.
When the inventory falls to six months or fewer, competition will start to push prices up. This time, hopefully, at a sustainable pace. Eventually, the upward pressure on prices will allow sellers in the non-entry-level category to become move-up buyers because they’ll be able to pull out enough equity for a down payment.
Until then, these would-be buyers will be sitting at the dock waiting for the tide to rise. —Rick Hazeltine