Locked in place with the housing downturn

It is also entirely possible that a disparity in the cost of homes across the country for the past ten years encouraged mobility as couples flocked to lower cost of living areas while retaining a similar income. Given this idea, it makes sense that over the past few years the mobility rate was higher then than it is now. Now in 2009, why move away from a place you have steady employment with the goal of gaining a lower cost of living when it is possible the cost of living where you are may be within your means in another year? As home prices continue YOY declines, individuals that are not "priced in" to the market may opt to stay where they are and serach for housing where they are as opposed to moving.

Of course, politicians are trying their hardest to prevent a lower cost of living from happening here in MA,: taxpayer funded bailouts of homeowners, artificially low interest rates, and a 25% increase in the sales tax. But look at the bright side: it means the mobility numbers will rise!

Economists and bubble bloggers have been warning for years about the inevitable lack of mobility caused by an (inevitable) housing downturn.

A close family member of mine has delayed the purchase of a home for years, partly at my urging. Now, with prices fifty percent off from their peak in his target area, he began looking in earnest, but just last week was reassigned by his company to a site in another state. Even though he is well off, he is not really in a position to decline the reassignment.

Even at fifty percent off, prices continue to fall where he currently resides. Had he locked into a new purchase at these "bargain" prices, he would have taken an expensive haircut because of career realities.

He will, of course, rent in his new location, both because prices continue to fall and because of the uncertainty of any new position.

Very few people really have the five year time horizon that is prudently required for the purchase of a home. Realizing the hidden cost of lack of mobility in a recessionary or stagnant economy will cause more people, like my family member, to delay purchasing homes, which will have further negative consequences for the housing market, though positive effects for the economy because renting fosters worker mobility.

I'm seeing this with people I know as well. Three or four years ago when many of my friends were buying, the mantra was, in 5 years when our home is up another 30% in value, we'll upgrade. Now what I hear is, we're probably staying put for another 5 years or maybe we'll test the market this year and see if we can sell our home.

"That simple freedom" is called renting. Wasn't a house purchase supposed to be for longer term situation? Except for the craziness of the past 10 years - buying a house for 2-3 years was never good financially...

Thanks for bringing up the relationship between the American Dream and owning in a down market, which struck a chord because we sold our home after six years of owning and are relieved to now be renting for a while. We're approaching 40 and have a child, and I know that my family (very traditional) would consider us far more successful if we were living in a house with a rapidly depreciating housing value that kept us locked in place (But look--they're homeowners!), than as we are now: waiting out the storm until we can purchase something we really want in a market that's very precarious and still overinflated.

As much as we love the freedom from upkeep and expenses we get by renting, along with the opportunity to live in a desirable neighborhood with no commute for half of what it would cost to own here, I think that some people do view us as being on the outside of the American Dream right now. When I recently learned that our old place is worth almost 10% less now than when we sold it last year, I was really struck by the irony of the situation. But as the saying goes, old dreams die hard.

Sunny Jim brings up an interesting point with his recalling of his family member's work required move.

The NAR almost always insists that the purchase of a home is an investment in one's family. But in a recessionary economy with growing unemployment; perhaps an investment with less risk and a greater return on the investment is in one's mobility?

Note: past performance is no indication of future returns.

yep. By the end of this anyone who bought after 2000 is likely to be underwater on their mortgage, and thus not able to sell. It'll be interesting to watch the results of that, I'm really not sure on the implications.

Case shiller for February plummeted again - down 18.6%, whereas it was down 19% the month previous. People are trying to pretend this is good news, but another tranche of mortgages just went underwater.

excellent point Sunny Jim, even in a "stable" market, the transaction costs (brokers fees, closing costs, etc.) make owning a house any less than say 7 years untenable from a financial standpoint. In a time of relatively unstable jobs, for many people, mobility (via renting) has a tremendous "tangible" value now.

Post #3 is right on the money: "Three or four years ago when many of my friends were buying, the mantra was, in 5 years when our home is up another 30% in value, we'll upgrade."

Scary that a lot of people lived by that mantra, and now are potentially stuck in houses they don't want or for much greater periods of time (that is, without taking a big financial hit).

Proverbs 22:7 - "The rich rule over the poor,and the borrower is servant to the lender."

Debt is slavery... People are finding this out the hard way.

Sunny Jim- In what area are the prices 50% off peak prices?. The only place that I have seen that is the Detroit/Flint area. Miami and Key West are nearing that number but, have a ways to go.
The trickle down effects are going to be devestating. I can see BMW dealer ships closing ,and the prices of off lease BMW'S crashing.as the real estate agents turn them in.

Charles: "yep. By the end of this anyone who bought after 2000 is likely to be underwater on their mortgage."

I disagree. Only though who bought with 0 % down and interest only balloons.

bv, your comment doesn't even make sense. What does a balloon payment have to do with being underwater?

Lance - Cast off those chains . Debt is a state of mind .
A mentor told me early in my education , " You are not a man until you owe a million." I became a man quite quickly, and have done well ever since .
Debt is good ! It keeps alot of people working.

Certainly I am no expert on mortgages, so help me, Marcus. When you pay interest only, what happens at the end? Don't you owe all of the principle still, as a balloon payment? Or do they just write it off? Maybe the terminology is wrong, so my apologies...thanks for your help!!!

If you paid no principle at all, and the value of the property declined, you will "certainly be underwater". If you paid some principle, you may or may not be underwater.

What I think you are saying is, only homeowners with virtually no equity will be underwater. That is patently untrue, even with declines to date. The Case-Shiller index for Boston already shows a drop from peak of nearly 20%, so even people who took out plain vanilla, conventional mortgages with 20% down payments at the peak are already underwater, or getting there very soon.

#5. The American Dream has become the American Nightmare for many. And when we wake up from this nightmare, I suspect that most people will view a home for what it is, a roof over your head, not your single biggest investment.

In what area are the prices 50% off peak prices?

That's pure Case-Shiller in the sunbelt, and certain neighborhoods in SoCal, BA, and Florida [tinyurl.com/dau7r4].

I've argued here before that there is significant downward pressure on northeast home prices by drastic price declines elsewhere in the country, at least where the local economies provide jobs that attract (mobile) workers to move there.

bv - certainly not all, but most, post 2k homeowners will be underwater on a 30% drop. Even with a 20% downpayment. Given that is not a crazy number by any means (though 50% probably is around here - note not in Phoenix though) its far from inconceivable. I'd say its highly probable

many homes in the less desirable markets in the Boston area selling at 50% off also. Just read Banker & Tradesman and check out places like East Boston, Dorchester, Brockton, no shortgage of houses (especially multis and condos) selling 50% off from their last sale. As SJ mentions PLENTY of inventory in CA, FL, AZ, and NV going at 50% off peak.

Thank you thank you Marcus! I now understand that Charles must have been correct, and that "anyone who bought after 2000 is likely to be underwater on their mortgage" based on your explanation. I feel so silly for ever questioning an absolute statement.

I suppose, though, if someone bought in a neighborhood where prices haven't declined much or at all (e.g. Arlington) they might not have lost as much as elsewhere. Just a crazy thought!

Marcus and Charles-
We are not underwater. In fact- the value of my home went "UP" since I purchsed it according to my bank. We "purchased after 2000" but when exactly after 2000 do you mean- until ~2006, or even beyond that into '07 and '08?

I said I wasn't going to post anymore, but I had to on this one.

Sunny and Hung - There is no market in MA where the prices are 50% off .
There are the foreclosures and other distress sales but, prices are generally
nowhere near 50 % off since the peak.
The price declines in East LA, west Miami,Detroit /Flint are in areas similar to the less desireable areas in MA. There are a significant amount of subprime foreclosures and flip failures .The price declines in these areas are having 0 effect on the MA market.
Those that are selling at deep discounts are in need of significant repair.
What you read in the newspapers is not a true indication of the real situation.
The housing crash that you advocate is not happening.

I have many friends who bought in or after 2000 and are not underwater. They all have good jobs and have made extra payments towards the principle.

remaven, I own property in Scottsdale, AZ, one of the premier cities in the west, and values have gotten hammered. I speak from first-hand knowledge...

REmaven,
"There is no market in MA where the prices are 50% off ."
If that is true can you please tell me why the median price for a Ma. single family home fell from 357K in Aug. 05 ( Warren Group ) to 245K in Feb. 09 ( Warren Group ). We all know that prices didn't fall in Arlington, any of the W towns, Boston's "golden triangle" ( Sunshine and Lollipops ) , or any other town with a decent school system. With all the W towns in Ma. , Winchendon, Wellfleet, Ware, Walpole, Wilmington, Wenham, Wrentham, Wareham, Webster, Westwood, to name ten of the more working class W towns, how is this happening? No market is off 50%? I guess only the poor are selling these days.

rem
i hope for your sake that price speculation isn't your only game. you're correct, to this point in the correction no community has experienced a 50% price drop, yet. a couple are close and i'll bet you a coffee they get there. the national meltdown in real estate has had no effect on the ma market? i suppose the fthb tax credit, lenders increased scrutiny and artificially low mortgage rates are a media or blog "advocators" fabrication. what i can tell you is that our target market has been very resistant to the correction up until late winter. the sales that have closed in the last 3 months have seen very aggresive buyer bid strategies successful an astonishing amount of the time. by agressive i mean a deal that closes 90% or less of the final asking price. even with these factors the spring market is still nonexistent. nothing is going under agreement. i'll bet you a bagel to go along w/ my coffee that there will be substantial price drops in these high end towns by august.

third time posting should be a charm...

Yes, there is at least one area where real-estate is down 50 % in the Boston area: Brockton.
Jan - Mar 2009: 130
Jan - Mar 2006: 286