A good portion of the real estate market is made up of homeowners who uproot and purchase their second or third house. More and more often, however, people are deciding to stay put instead of upgrading their homes.
One such example is Greg Rubin, who spent a large portion of 2016 thinking about buying a larger house. After 17 years in the same abode, Greg wanted to expand from a two-bedroom to a home with space for guests, a workshop and some additional office space.
Mr. Rubin is the owner of California’s Own Native Landscape Design in Escondido, CA. “My girlfriend would like to get a larger house, but right now, I’m staying put,” he says.
At present, it seems as though people like Greg Rubin are more the rule than the exception. Fewer homeowners are moving these days, which is putting a strain on the real estate market and overall economy. This trend is also causing increased competition among prospective homeowners, as it becomes harder to find available property. The spring season hasn’t been as robust as usual and real estate brokers are seeing less in the way of commission.
This movement of people remaining in their homes instead of looking for an upgrade began largely in response to the recession. Businesses like Rubin’s landscaping firm saw a drastic decrease in revenue in the years following the market’s collapse, making the idea of purchasing a home seem very farfetched.
Millions of others found themselves living in houses where the value plummeted below what was owed to the bank.
These factors, as well as several others, led to a huge rise in the median homeownership period, which reached eight and a half years in 2016. In 2008, that number was only three and a half years. This is according to information from Moody’s Analytics and First American Financial.
With the economy mostly recovered, some have assumed homeownership tenure would return to numbers closer to those 2008 levels. However, many experts are predicting that, even with reduced unemployment and major growth in housing prices, this new standard for length of stay will continue for at least another 10 years. If this holds true, the main culprit would likely be increased interest rates.
The housing bubble led to historically low rates for mortgage refinancing, so millions of people, like Greg Rubin, now pay between three and four percent interest on their home loans. To take on a new mortgage now, even for a similarly priced house, would come with a much high interest rate. According to Zillow, with $500,000 30-year fixed-rate mortgage, increasing the interest rate to 5.5 percent would up monthly payments by an estimated $700.
While interest rates were as low as 3.5 percent in October, they’ve recently risen to over four percent on 30-year mortgages. The expectation is that these rates will creep toward five percent before the end of the year, as the Fed has indicated that rates will likely increase further. The more interest rates go up, the less likely homeowners are to consider a move.
According to Zillow’s chief economist, Svenja Gudell, this trend is still on the upswing. “Once mortgage rates climb to 5 or 5.5 percent, we are going to start to see the lock-in effect really take hold,” Gudell says.
In addition to interest rates, other scenarios are playing out and influencing the housing market. As Congress moves toward tax reform, those in real estate are cautiously eyeing the removal of homebuying incentives as outlined in President Trump’s tax plan. There is also some overall economic skepticism that could affect what steps the Federal Reserve takes in the coming months.
Above all, housing trends like this are strong indicators that the U.S. economy has not entirely recovered from the crisis of 2008. Even with the subsequent reforms and policy changes, the market is still far from what it was in 2006.
Despite steady population growth and measurable economic recovery, the sale of existing homes is still nearly 25 percent off from where those numbers were before the collapse. Single-family home starts are only halfway recovered, as that statistic was measured in March at an annual rate of 821,000. The largest generation in U.S. history (millennials) has been steadily moving into the workforce, but that has yet to provide a real housing boost.
Mark Zandi is the chief economist at Moody’s Analytics, and he doesn’t necessarily believe the market will return to its previous peak. “We are coming out of a deep, dark hole called the housing bust, but we are a long way from normal, and we may never get back to normal, if normal was the average person stayed in their home for four or five years. We’re at eight-plus now, and even under the best circumstances, maybe we get to six.”
The Institute for Housing Studies at DePaul University released a study in 2014 which predicts more homeowners will stay put in cities with pronounced job growth and affluent neighborhoods. Because lenders tightened credit standards in the recession’s aftermath, refinanced mortgages skewed toward those who had better credit and lived in more desirable areas. With interest rates back up, those people have little incentive to move.
It’s worth noting that the overall cost of moving also has some effect on the current homeowner’s tenure. Packaging, furniture and all the other related fees add up quickly, and people who are still recovering from the recession are less likely to take on those expenses.
In addition to hampering the real estate market, the interest rate lock-in trend could have other economic ramifications. In many cases, the motivation to take a job in another city has decreased because the cons of home buying outweigh the pros of the new position.
“People aren’t moving from weak economies to better economies,” Mark Zandi points out. “They aren’t moving from jobs that aren’t as suited to them to jobs that are. When moving becomes more difficult financially, the economy becomes less fluid.”
This change is very noticeable for real estate agents. Glenn Kelman is an executive at a national brokerage firm called Redfin, and he’s noticed a definite decline in inventory. “People who buy a home and sell their home are the meat and drink of the real estate business, but increasingly, we’re only getting half the sales from them,” Kelman says.
People are buying more cheap properties that need to be renovated, and the existing-home shortage is spreading from the bigger cities to the surrounding areas and traditionally less-expensive markets. Bidding wars are becoming more and more common. Kelman notes that more and more homeowners are choosing to become landlords instead of selling, turning more buyers into renters and taking business away from brokers.
The National Association for Realtors measures a 60 percent decrease in homes for sale since 2007. With such limited inventory, more young couples choosing to rent instead of buying.
Eric and Amanda Olson are the renters of a two-bedroom apartment in Chicago. The Olsons have lived in this rental for several years, even though they have looked for a house each spring for the last few years. At the outset, they kept the search to homes in their general vicinity, near Wrigley Field. As the search continued and buyer competition increased, the couple started looking in other parts of town and even outside of the city limits.
Eric, who has a good job working in information technology, has grown discouraged. “There is no inventory – we’re talking four or five houses in our price range a week. Some of those are houses with holes in the floor, holes in the roof – and even those are flying off the market.”
It’s easy to look at home prices and feel as though the market has made a strong recovery. Digging a little deeper, you can see the lingering effects of the housing crisis, and it’s clear that people are still feeling repercussions.
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