starter homes in a downturn?
Question for anyone who's got a good hand at analyzing data from the last downturn (and forgive me if this has been beaten to death; I haven't checked into SB as much lately):
How do starter homes fare during a price correction? More to the point, is it a top heavy phenomenon, or does a falling tide sink all boats? I would guess that big ticket homes would take it on the chin, but starter homes would suffer less.
I'm asking because I'm trying to decide when (I know, timing the market=bad) to buy a small starter house ($350k or so) and this makes the timing critical for me. I can barely afford the $350k price tag (as you can see from the price, I'm already venturing well outside any desirable areas), for even the most basic of homes (800-1000sf, 2br /1 ba). There isn't a whole lot of downward mobility for me. Condos and townhomes are not an option due to HODs (I consider them a waste) and stairs (because I actually plan to live in my house until I'm much older)
Let's say the market goes up 10%, I would be unable to comfortably and sensibly afford some of these ugly little starter homes. And we have a household income well in excess of median with good savings and very little debt.
So because I sit on the fringes of affordability, this is a critical question for me.
If I had bought a starter home in Seattle during the last downturn, would I have lost much at the trough? What might I expect now?
How do starter homes fare during a price correction? More to the point, is it a top heavy phenomenon, or does a falling tide sink all boats? I would guess that big ticket homes would take it on the chin, but starter homes would suffer less.
I'm asking because I'm trying to decide when (I know, timing the market=bad) to buy a small starter house ($350k or so) and this makes the timing critical for me. I can barely afford the $350k price tag (as you can see from the price, I'm already venturing well outside any desirable areas), for even the most basic of homes (800-1000sf, 2br /1 ba). There isn't a whole lot of downward mobility for me. Condos and townhomes are not an option due to HODs (I consider them a waste) and stairs (because I actually plan to live in my house until I'm much older)
Let's say the market goes up 10%, I would be unable to comfortably and sensibly afford some of these ugly little starter homes. And we have a household income well in excess of median with good savings and very little debt.
So because I sit on the fringes of affordability, this is a critical question for me.
If I had bought a starter home in Seattle during the last downturn, would I have lost much at the trough? What might I expect now?
Comments
Good properties in close-in neighborhoods (in terms of commute) will do the best.
So a starter home in Kent or Auburn, or even someplace like Columbia City? wouldn't touch it. If you can swing a decent place in Queen Anne, Capitol Hill, Bellevue, etc - it will probably be less subject to big price downturns.
my $0.02, FWIW
But if I bought a place, it would be probably in Northgate or Shoreline. Is this still in the 'stay away' zone? It's a very confusing situation (like I explained, the timing is very critical for me, because being Priced Out For a Very Long Time is a realistic possibility) but your insights really help.
Anyone with more knowledge of the place have any opinions?
I have been following the rental market on the North End pretty closely the past few months, out of necessity. As of now, there seem to be a lot of relatively inexpensive houses and a few condos for rent in Shoreline. If they have not sold by now, the owners probably have had them awhile. Draw your own conclusions.
The second factor will hit people looking for a starter home hard because these people have no equity from a previous house to use as a down payment. People looking for starter homes also tend to be young and would guess young people these days are terrible at saving money, have a significant amount of debt (school loans, credit cards, car loan, etc.) and probably don't have very good credit.
So you are probably in a very small minority of first time buyers that can actually qualify for a loan that you can afford. Everybody else is now priced out of the market for the next decade. Given all that and the glut of condos coming online in the next year I would bet starter homes will take a pretty big hit in prices.
I have been technically in the "market" for a starter home for the past 3 years. Occasionally looked at a couple places. Shopped for loans, things like that. I was looking at the 'starter' end, and the obvious signs of the incredibly overheated market for starter homes bought with questionable financing were creeping me out.
This stuff is starting to unravel, and it will start out of town and spread 'in town' faster than anyone thinks. It has already started at the high end and the low end. Watch for more reductions soon - very little is moving in those segments. The effects which have been blogged about (including on SeattleBubble) for years of this pinching the "upgrading" buyers are coming true. It is going to be very noticeable.
I decided to sit on the sidelines, "keep my powder dry". I will still be looking for a 'starter' place, but I intend to get that starter place for several percent cheaper than during the bubble years. The discounts I've seen on starter homes already outstrip the potential 'equity' I might have been sending to the bank. That is to say, every few thousand bucks that a starter home declines in wishing-price counterbalances a year's worth of rent for a bubble-sitter.
Bring on the credit crunch
And CA taught us that there's plenty of room for people to continue being stupid -- one good byproduct of the credit crunch will be to save people from themselves by denying loans to those with poor judgment (who are primarily responsible for the situation to begin with).
But for the rest of us, I don't know that prices will go down (even though they SHOULD), because owners/sellers have to be complicit, and I'm not sure that they will. They might be inclined to sit and wait just as you and I are.
The Seattle Bubble could well work out to be a multibillion dollar staring contest.
Yup, in today's article: California cities fill top 10 foreclosure list, while Stockton headlines with 1 foreclosure in the last 6 months per 27 houesholds (yes, you read that right! I grew up 15 mins from there - crazy stuff) -- anyway, Tacoma is already # 51 on this list of metros with 1 in 125 households - which I would say is a fair amount of pain.
Coming soon to a major 'special' metro near you.
Yeah, we demanded those no-doc loans. The lenders would never have offered such a thing, but I pounded on their desk until they gave me one. I mean, it's not like they had anything to gain by encouraging all this, is it?
Only the ones with a fixed mortgage. What's that, about half these days? Prices are made at the margin. Only the desperate people carrying an ARM are required to sell or foreclose. You can only sit and wait if you can keep paying the bank. If you fail to do that because interest rates go up 5-7% to where they should be, then it depends on whether the bank is inclined to sit and wait. They won't be so inclined.
I don't have a deep well of sympathy for those who now say "I didn't know what I was getting into" or whatever. It just doesn't float. Regardless of what loans were out there, people irresponsibly and foolishly chose neg am, IO, etc without understanding them. Don't forget, not one of those exotic loans would have exploded in popularity the way it did without DEMAND.
People actually did effectively pound on loan officers' desks and ask for those loans, because if they hadn't, the weird money would've faded away like every other product nobody wants. Unless banks were assigning people mortgages at bayonet point, that's a pretty unconvincing argument.
I doubt that any analyses of previous Seattle area real-estate downturns will be that useful in anticipating what we are going to see with our current crash. There has never been a comparable time where credit became so loose, with the marketing of such unholy toxic mortgage products (e.g. negative amortization, interest only, etc) as we've seen in the last 5 years.
This credit boom has been unprecedented, leaving our local real-estate market far more fragile than it has ever been. There is an incredible number of home-owners who are just hanging on by their teeth, and got into liabilities they couldn't really afford simply because they expected appreciation to bail them out.
I expect that the bottom of this current real-estate recession will be FAR more severe than anything this area has seen in the last 60 years.
History may not repeat itself, but it does rhyme a lot
Mark Twain
unfortunately, the data for seattle only starts in 1990 so the first look at YOY you get is in 1991 - which was at the end of the downturn.
What a relief!?! I was worried there might be evidence that our housing downturn could last 100 months, but fortunately Case Shiller proves that no housing bubble is more than a 97 month affair.