Tuesday, October 07, 2014

The problem isn't the "trade up" market - it's the "trade down" market.

Today the headlines are filled with news the housing market is headed for a triple dip. I'm not sure exactly when the "second" dip happened to warrant a "triple dip" category. But whatever.

Everyone is obsessed with the idea that the housing market is flattening because people can not trade up to non starter homes opening the door for first time borrowers. I don't see this as the problem at all and I'll tell you why.

A curious thing happened through the recession that I never could have predicted. There was an enormous compression in housing prices. It started a couple of years ago and only grown worse until this day. Low price houses got way more expensive, and expensive houses became way cheaper.

What started to happen was the only area that banks were lending to was the under jumbo market. Million dollar houses were caved for the first four years of the recession. I don't actually track their prices because I've always thought million dollar houses were hard to move. I would never consider buying one even if I could afford it. For me, they are either moving or not moving. I don't care about the price because I'm not interested in that market. They have started to move in the last year or so which has warranted article after article about how great the 1% are doing. But they have to move eventually!

The interesting bit is what happened in the neighborhood my rental is in.

When we bought our rental, it cost pretty close to half of what we paid for my house. The neighborhood is solidly working class. While only 10 blocks apart - my neighborhood is filled with nurses. The rental neighborhood is filled with teachers.

Now my houses are worth almost exactly the same amount. Within 50 grand. Slightly more than 10%.  This happened within two years. Houses in my neighborhood have actually been declining in price for a few months now. (maybe 6) The slightly over jumbo area (still my neighborhood) has regained some price power, but it is the snail in the housing ointment. This is the "trade up" market sector. If the problem were people not being able to "trade up", price appreciation in this area would be much better. In reality this particular segment has almost stagnated in price. I still have quite a bit to go before I'm not upside down.

Now however, the first time homeowner segment is almost as pricey as the trade up market. Universally across the whole town. And it doesn't seem to be breaking at all. I keep thinking it will, but a house on the block of the rental was just listed at 50 grand under what similar houses are selling for in my neighborhood. And I think they might have gotten it. After nine days the listing was removed from Zillow. I'm just waiting to see what the final price is. Sure I have two agents who are willing to give me that info, but I just don't want to deal with them. They make my brain hurt. Their reality is not my reality. I will know soon enough anyway.

All I know is from my perspective - there is no first time buyer housing segment currently. That is the problem. Everything is way too expensive. This is the problem with the market.

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