McJobs
I'm sure Tim will post this tomorrow, but I just had to weigh in. Let's see - where have I heard this before? Oh yeah, on seattlebubble.
One thing missing in jobs boom: high pay
Best stat:
I feel like pulling a few choice quotes from some board members up...
One thing missing in jobs boom: high pay
Best stat:
Of the 240,000 jobs created in Washington between 2002 and 2006, almost 70 percent were in fields where the average weekly pay was less than $832 a week (or $43,264 a year). That's the income calculated as a "living wage" in Washington for a family of two adults and two children, according to Penn State's Poverty in America project.
I feel like pulling a few choice quotes from some board members up...
Comments
People I know are already starting to leave for higher pay in other parts of the country. Myself included. I'm outta here at the end of the month.
Tainer said she expects the middle tier of industries — those paying $31,000 to $48,500 a year — to lead statewide job growth for the foreseeable future.
These people better be saving religiously if they ever want to buy a home. Too bad religious saving doesn't do much to support other service jobs.
Hmm... lets see, with 'strong employment' no longer a valid talking point of the local REIC, what do they have left? Not so sure that 'quality of life' is going to be mentioned much this week when the I-5 paving project starts.
Speculation is the symptom.
How are MOST people getting the $$$$ to upgrade from their 1st house to their next?
I know about the first-time buyers who are putting 0% down, carrying 80/20 mortgages, and about the couples who are cautiously purchasing at 3x one earner's income. I want to know about the people who launch into homes priced 5x beyond what they bought their first house for less than a decade ago.
Do the people who sell their houses to downsize into condos after 30 years?
Do the GenXers inherit from their dying grandparents?
Are the majority of upgraders earning income that increases at a rate faster than home values?
Do the baby boomers inherit from their dying parents?
Are the upgraders just as likely to be screwed as the first-time buyers? If so, why are the houses that cost twice as much as the entry-level homes still selling relatively well?
Example: 1998 is the year a young couple in a "hot industry" buy a home. They buy a house at 3x their income in Seattle.
2007: same couple, still working in their "hot industry" doesn't think they can upgrade, because their house is worth 3x their current income, and a bigger, newer house would be priced at more. Their hot industry had a downturn between 1998 and 2007 and they're shy about risking a bigger mortgage payment, choosing to treat their home as a place to live rather than an investment (until the market sours again). Their incomes have doubled, but so has their house value. They've run to stay in the same place, essentially.
Is it all dependent on stock options, lottery winnings, insurance suits and inheritances?
Are more established homeowners increasingly confident they can hold a higher, longer mortgage?
Is it because the general zeitgeist is "owning a home outright is for suckers?" and mortgage-burning parties are passe?
What steady, full-time occupations have done better than doubling income from 1998 to 2007? Should the couple consider a career change? Are they falling behind in Seattle?
Thanks for posting. This is a good question, one the media generally disregards.
This is just the people I know, but it seems like the majority of 'move-up' buyers are families in the 35-55 demographic. Some of them have gotten new jobs and thus feel like they deserve a bigger house, other just have a growing family and feel like they need more space, better schools, or a better neighborhood.
But your question was really how do these people do it. First, moving up is slightly less hard than buying straight into that bigger house. Let's crunch a few numbers.
Assume that the 1998 start home cost $200,000 and the upgrade home cost $300,000. Both doubled in 'value' so the buyers have an extra $200,000 in equity. They have only owned for 9 years, so they have built little equity from mortgage payments. Let's also assume these guys never pulled equity out of their home. So just the equity from the boom gives them a 20% down payment on the upgrade house.
But they are doubling their total mortgage ($200,000 to $400,000). How does that work? They have probably received some raises to compensate for inflation over the years. Let's assume they did better and actually got a 4% annual raise. Their income has risen by about 35%. This increased income means in real terms, their mortgage is just 1.4 times as expensive as their original house.
So what you would expect is these upgrade buyers will own a little less of their house. This graph shows what's really happening
At the same time, the number of owners who have 100% equity (they actually own their house instead of the bank) is around 1/3. My understanding is that number has not moved very much. So retired people (and the ultra rich) own their homes, they are not moving out very often, and everyone else is dragging down the percent of total equity. Look at the graph above and you'll notice that 2/3rds of all home owners owe 50% of the total value of real estate in America.
I hope this answers your question.
Yes. I'm curious also how they manage it without taking on a larger mortgage. I'm happy you provided some numbers to illustrate your point, I hope you don't mind if I use them to elaborate my question.
$200,000 -- cost of first-time-buyer (ftb) house in 1998. Couple A puts down $40,000. Quickie mtg terms: 7%, 30 year loan for $160000 = $1064.48 monthly mortgage payment before taxes and insurance ($212.92 more) ==> $1277.40/month.
$300,000 -- cost of upgrade (u) house in 1998.
Let's assume the first-time buyers in 1998 have an income of $70,000.
You give them a 35% salary increase over eight years: $94500.
Fastforward to August 2006 when Couple A sells $200,000 house for $400,000 and miraculously do not need to renovate or improve it for sale. Remaining balance on mortgage is $142,186.64 (Bankrate.com mortgage calculator). Couple A shells out 6% in commissions = $24,000.
$400,000-$142,186.64=$257,813.36 - $24,000 = $237,813.36
They haven't done a Mortgage Equity Withdrawal or a refinance, and they've saved a year's worth of mortgage payments in a taxable emergency fund.
Upgrade house cost in 2006 = $600,000. Purchase taxes @ 1.76% = $10570. Mortgage loan origination costs, 0.5% point, appraisals, document fees, escrow stuff, title insurance, blabbety-blab: $5000.
$237,813.36 - $5000 = $232,813.36 - $10570 = $222,243.36 to apply to downpayment.
$600,000 - $222,243.36 = $377756.64 mortgage for a couple earning $94500. Maybe I'll have the couple go for a 20-year term, because they don't feel like holding a mortgage when their major concerns are going to be healthcare, heating, personal services, and food in their "golden years." 6% for mid 2006. Now they have a $2706/month payment (before taxes & insurance), as opposed to a $1064.48 payment (before taxes & insurance). Add taxes and insurance = $3308/month is the new payment versus $1277.40/month.
How does the couple typically get $235,570 over eight years, earning an average of $82,250 Adjusted Gross Income, to apply toward the $600,000 house so they don't have a larger mortgage? This is why I asked about the stock options and inheritances. From 1998 to 2006, any family saving 10% of their income and earning 8% return was doing really well compared to other families in the U.S., but not well enough to get $235,570!
If they do opt for a larger mortgage:
How does the couple pay $1600/more a month without blinking?
How does the couple not mind paying over 33% of their gross income on mortgage (before taxes and insurance) without blinking?
This is what confuses me. Do we live in an area where homeowners who move to an upgrade house are atypical compared to homeowners in other parts of the country? Why wouldn't their comparatively larger mortgage loan and payments freak them out? Where does their security come from?
Even considering that, you're right that they are paying more money each month. What I'd say is you should look at the Mortgage amount divided by their income. The numbers we came up with suggest they have a mortgage equal to approximately 4x income. I don't think that's too peculiar around these parts. And if you start with the assumption that your house will appreciate at 10% a year, then its worth stretching to buy.
I recall an article about a year ago about how rising prices actually pushes move-up buys further out of range. The example we came up with shows that very well. The couple is now taking out a $377k mortgage when they could have bought it outright 9 years ago for $300k. This is just evidence that starter homes are a kind of myth in rising markets.
I'm sorry I don't have a better explanation. But I think your impressions are spot on.
I have a friend who bought his first house for 185K in 1998, top of Queen Anne, put maybe 50-75K into it, and now it's Zillowing at close to 700K.
He refinanced into a 15 yr fixed, no cash out, he owes less than 100K, got married and his wife works, his salary nearly doubled and his houshold income tripled. So he has 600K in equity, and could qualify for a million dollar mortgage.
Of course he's frugal and is staying put, but he could easily double his house without much stress on his expenses.
That's what happens when housing values triple in 10 years. Get in at the right time, and you are set.
At the wrong time, and you are hunting Suzanne with a bowie knife.
Except decisions are often more than economic. And I posit they should be.
Besides, what are going to do with the 600K? Buy Krugerrands and sit in some cave on top of the pile armed to the teeth, as they slowly depreciate in value?
Probably better to enjoy your sweet QA home.
Now if he wants a reasonable bet, here it is. Refi, pull out some of the equity, and invest that in foreign companies with good dividends. If he can get 6% on dividends, it pays off the cost of borrowing the money against his house. If he can get 8%, he makes a profit. Meanwhile he has diversified his equity, which makes him safer during the down turn.
SELL SELL SELL!
YES YES YES.
This is exactly how it works. After all, you "save" money by paying more interest because of the wonderful tax deduction!
There are two ways in which people pay back loans.
1) By paying the P&I over the life of the loan (30 years, whatever)
2) By selling the place, after it's appreciated.
The frenzy over the past few years encouraged more people into the (2) camp. Imagine you've got a few years left of your mortgage and you're 50. You could buy a mega mansion on a 30 year mortgage, with the specific intent that you'll sell it when it's worth $403 Billion in 10 years! You absolutely MUST get the biggest and nicest house your "payment" can afford!
Or, you could upgrade, a little, and keep your original loan term (another few years). That's not nearly as sexy and cool!
If you KNOW that housing only ever goes up, and it only ever goes up 10% a year FOREVER, then it ALWAYS makes more sense to leverage as much as possible.
The future will not be kind to these people...
I think that's what's happening to the people who refinanced at 5% fixed... nothing else other than a short-term teaser rate is going to look as good, so might as well make one's own house "the upgrade house" by remodelling it. Fortunately these "5%-and-under fixed rate" people have other ways to be sexy and cool without getting into debt. Debtfree's kind of a subversive thing to be these days, isn't it?
The MSM focus seems to be on the subprime and the first-time buyer, and not on the people with equally as huge mortgages who traded up... wonder why.