A starter home comeback here in Massachusetts?

virtually the only opportunity in the fthb market is beating the financially illiterate who have bought into the mantra that renting is throwing your money away. depreciation is throwing your money away too, accept it's leveraged. there is some opportunity if your first home is a long term solution (12+ yrs). if you buy a house w/ a low interest rate and a tax credit and sell it to someone who does not get those same benefits you will lose real dollars. prices have been falling even w/ near historic lows in rates and government intervention and foreclosures are a major issue b/c real estate is so dramatically overpriced as compared to people's ability to earn.

the quality of "starter" home here in MA, is abysmal compared to most other parts of the country, in terms of what you get for your money. Cash for shacks (aka the Knifecatcher Enhancement Program) have spurred low-end sales, and it looks like this program will be extended. However it is amazing that the only way to prop up housing is to literally "pay" someone to buy, via a paltry tax credit.

Looks like even high income earners are going to have to settle for a starter home:

"30% of Americans making $100,000 or more each year are living paycheck to paycheck, reports a CareerBuilder study this week. That’s up from 21% last year -- a number that still seems awfully high.

61% of all Americans say they are in a similar bind… making just enough to finance their lifestyle every month. Just a year ago, 49% were living paycheck to paycheck.

The No. 1 way to make ends meet on a tough month? Cut savings. Check out these quick stats:

· 21% of correspondents have reduced or eliminated 401(k) contributions in the last six months
· 36% don’t put any money toward retirement
· 33% don’t save at all
· 30% that do put some away save less than $100 a month.

Puts an interesting twist on the much belabored rising savings rate, doesn’t it? The personal savings rate as reported by the government has nearly doubled from this time last year -- from roughly 2.5% to 5%. [that's because the government counts debt servicing as savings]"

Leaving aside the question of whether right now is a good time to buy in general...

My understanding of the "starter home" concept was that you bought a small, relatively cheap house, owned it for something like 7-10 years, paid down some of the principal, maybe enjoyed some gains in the price, and saved up some cash. Then, sometime around the 7-10 year mark, you sold, and used your cash and equity to get a better place more suited to your long-term needs.

The plight of people who bought starter homes at the peak of the bubble has been discussed to death. Even if they're financially stable and they've been socking away cash, their cash+equity doesn't put them in a position to move up any time soon. So they aren't putting their starter-level homes on the market any time soon.

But what's been largely ignored is the people who would have bought a starter home in 2004-06, were in the financial position to do so, but passed because the market felt way too high (heathens!). Even if they feel we're near a bottom in today's market, should they buy a starter home? If they'd like to be in position to move up in 3-5 years, does it make sense to buy? Or does it make sense to keep renting, if you're only a couple of years away from being able to afford that move-up house? What's the minimum amount of time you should plan on holding on to a starter home?

The $800k 4-br in Wellesley certainly sounds like a case of a first-time home buyer skipping the starter home and going straight to the move-up home.

Ha,

Try getting a decent 3 BR, 2 bath Single Family in the non "W" suburbs for around $350k, in a "good" town. (ie, 4x the annual income of a couple making $80k a year).

Anything thats reasonably priced is a "compromise", or in need of updating/repairs worth tens of thousands of $$$.

That might have been worth dealing with, when the market was going up, but its simply not worth it now, with prices expected to fall another 10-25%.

The housing values have fallen, but also the housing quality has fallen at a greater rate. If you factor in the cost of work that needs to be done to the houses, added with the asking prices, the costs are the same as they were in 2005. Most first time homebuyers arent fooled, some are. Ill continue to wait.

This does not bode well for the higher end market or the coming mortgage crisis in Alt A, Prime and Option ARM loans that were given to more credit worthy borrowers:

From the LA Times:

"Who is more likely to walk away from a house and a mortgage -- a person with super-prime credit scores or someone with lower scores?

Research using a massive sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50% more likely to "strategically default" -- abruptly and intentionally pull the plug and abandon the mortgage -- compared with lower-scoring borrowers.

Among researchers' findings are these eye-openers:

The number of strategic defaults is far beyond most industry estimates -- 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year's fourth quarter.

Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they've fallen behind on other accounts.

Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.

Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances.

People who default strategically and lose their houses appear to understand the consequences of what they're doing."

Even if you're NOT looking in the west suburbs, the quality of the "starter home," is poor at best. We are looking a bit northwest of the city, north of 128 and west of 93, and the deferred maintenance of a simple 3 Bed/1 bath is staggering.

Having looked at some foreclosures, it's clear that once the house payments stopped, so did the upkeep.

Sure, starter homes have come down in price, but those price concessions have a long way to go before they cover the overhaul required to make these homes fit for habitation.

James - "But what's been largely ignored is the people who would have bought a starter home in 2004-06, were in the financial position to do so, but passed because the market felt way too high (heathens!). Even if they feel we're near a bottom in today's market, should they buy a starter home? If they'd like to be in position to move up in 3-5 years, does it make sense to buy? Or does it make sense to keep renting, if you're only a couple of years away from being able to afford that move-up house? What's the minimum amount of time you should plan on holding on to a starter home?"

Exactly - which is why the entry level neighborhood is still struggling while good suburb is still largely flat. I was looking at starter home since 2005 with 25% downpayment, waited for 4 years, and now I can afford a move up house in a great neighborhood with 25% downpayment that I will not out-grow for 15+ years.

I find it funny how people say that the supply on the market, in general is junk. While it may very well be junk, it, for the most part is the same housing stock that was available 5 years ago. Of course, 5 years ago, home prices were going up 10% a year so people were willing to buy junk. Amazing how a few years changes one's perspective.

Steve,

People have specific complaints about the available options on the market, beyond just calling it "junk" (though a lot of it is pretty bad). First, there's the problem of upkeep. If people haven't done much maintenance in the last 5 years, then what may have been a nice house 5 years ago will now be junk. And second, there aren't enough options out there. Sure, you might get lucky and find a place that has the right combination of beds/baths/square footage/lot size/neighborhood to suit your needs, but that's a lot harder to do now than it was 5 years ago, and if you do find something that matches these hard-to-change criteria, you'll probably need to compromise on nearly everything else. Hence, the perception of "junk" on the market.

Lai - why would you out-grow it in 15+ years? Are you going to wait 15 years before you have children?

Steve- my thoughts exactly. People will always find something to complain about. The houses could be free and people would bitch that they have to replace the carpeting.

James: Assuming a modestly appreciating market, the minimum holding period necessary to justify a "buy" (as opposed to "rent") decision is generally around 7-10 years. In a flat or declining market, the break-even point occurs later. That said, why even think about buying a starter home now if you're only going to live there 2-3 years? If you have your heart set on an $800k house in Wellelsey then my advice is to rent for another 2-3 years at which point you will be able to pick one up for $400-600k.

Perhaps a better term than "starter home" would be "starter price."

Right now, homes in our "starter price" range are too small for our growing-family. It would be VERY difficult to spend 7-10 years in a 3BR/1Bath/1100sqft home when we have one toddler, one on the way, and hopes to grow in the future.

So, for now, still saving....still renting.

James, let me rephrase my comment: Five years ago, when everyone was a real estate expert and was going to bag a 50% gain on their property in 2 years, people were willing to buy less desirable homes in less desirable neighborhoods because of the irrational exuberance and thoughts of huge gains. Now that fundamentals are returning, people are becoming more picky and rightly so. Yet, homes are still overpriced in many areas, so people are not going to plunk down (nor can many afford) $400K for a fixer upper. It's the fundamentals (or lack of fundamentals 5 years ago) that, in a large part, drove the perception.

I have many friends that bought decent homes, in decent neighborhoods and have since put alot of money into upgrading them. I suspect that if they were in the market today, they would pass on those same homes.

Re: Still Renting. That home sounds exactly like a starter home. A house of that size was very common to grow up in, not long ago. Perhaps you grew up in something that size. If not, it's a good bet that your parents did. People's perceptions of what they need to raise kids has changed. Oh no, your kids may have to share a bedroom! (I shared a room with my little sister in a house about that size, in the 80s, and we weren't an unusual family.)

All snarkiness aside, I do think houses are overpriced in Boston, and wish you luck in your search.

I've been looking in the Western suburbs (Framingham, Marlborough, etc) for the last two months. I've noticed that a lot of houses on the market today have a lot of deferred maitenance. Most require more than just new carpets and paint. A large number have 30 - 40 year old kitchens, bathrooms, lighting, electrical, etc. Condo and townhomes are competing well in this market as their owners have either updated or have taken care of their homes.

I've also noticed a lot of homes where the home owners have been watching too much HGTV. They have updated part of the house, usually the kitchen, but have left the rest of the house in dismal condition. Instead of spending a ton of money on the kitchen, they could have spent a portion on the rest of the house. It's obvious that the second and third mortgages dried up as the housing bubble burst.

The problem, as been stated in other posts, is that there is still a disconnect between the list price and the actual value of the home. I am unwilling to pay market value for a property that requies $30K or more in updates just to get it into an acceptable condition.

Fortunately, I rent, have no debts, and just have myself to look after. It puts me in the unique position of being able wait out the market turmoil. I'll just keep saving up while looking for that diamond in the rough.

David

Mary, I actually grew up in something smaller. =) I have no problem living in a small home that's a little bit crowded--in fact, come this winter when our baby is born, our two kids will share a room, no question, even though we're currently in a 3BR rental. (I actually subscribe to the theory that kids are better off when they share rooms).

Our problem gets back to two things:
1. the poor condition of so many of these "starter homes" in our "starter" price range
2. it's not the square footage we plan to out-grow (I think a lot of times it's not that you have too little space, but rather, too much STUFF), but the bathrooms. Starter homes in the suburbs of new england will (more often than not) have only 1 bathroom....

I agree with Steve. I bought my starter home in 1991, and most of the stuff at the low end of the market is fairly similar in terms of condition to what I see today.

And as for growing out of my starter home... My growing family has been very comfortable in our 1400 sf home so we have no reason to upsize. When I grew up, there were several families in my neighborhood with 6-10 kids who lived in houses the same size as the home where I live now. I wouldn't want to be that crowded, but the space is adequate for a family with 2 kids. (I wouldn't want to go any bigger anyways... an extra room would mean space my ILs could use for an extended visit!)