Investors and home sellers alike should consider where the real estate recovery will occur first. Given the significant government push towards homeownership and the slow economic recovery, investors and sellers should expect the recovery to first start in the lowest tier of the market.
Starter Homes and the First Time Homebuyer
Starter homes vary by state and city. In New York City a starter home might be a 600 square foot studio condo selling for $550,000, while a starter home in Martinsville, VA might be a 2 bedroom, 1,100 square foot ranch home selling for $65,000. Regardless of the definition of starter home in any one neighborhood, sellers and investors should expect these homes to be snapped up first and quickly.
As the economy recovers, the ease of entry to a starter home will only get easier. With government support and bank owned homes flooding the market, first time homebuyers can obtain low interest loans to get into their new home with a relatively small down payment. Rental homes will continue to remain a competitive threat in this space; however, the sheer decline in home prices has made many once unaffordable neighborhoods attainable to even the most modest buyer.
If the down payment for a home in a reasonable neighborhood equals the security deposit and first month's rent and additional fees, expect more renters to opt for homeownership. As the rental market heats up in many areas and banks begin to offer incentives to buy foreclosed properties with low interest rates, expect this equation to come into play more and more often.
Second Time Homebuyer and the Trade-Up
This buyer drives the higher price point buys in most neighborhoods. As families become established and homeowners gain promotions and additional income, they simply trade up to larger/nicer homes. Many times increased incomes come with increased expenses, so these buyers may not have substantial savings built up. In the past, however, this group could simply rely on the profit from the sale of their current residence to pay for their next purchase. This game of musical chairs stopped abruptly in 2009 and does not expect to pick back up until well into 2011.
These buyers became savers in a bad economy and would rather stay in their home for two or three more years, save for a down payment and avoid an inevitable loss of their original equity on their homes. Sellers in this market would serve themselves best by going into “hunker down” mode. Avoid selling in the next year, if at all possible, because there will be few buyers. It might even be worth forgoing upgrades and marketing the home as a fixer upper to starter families rather than reinvesting in a stagnant asset.
Real Estate’s Version of Buy Low / Sell High
Sellers should avoid selling into this market, but buyers might serve themselves well by coming off the sidelines and negotiating hard. More than likely sellers in this market will be banks or desperate relocations. Either way, buyers looking to trade up should read the tea leaves. After starter homes recover, trade up homes will be quick to follow. Don’t miss the chance to buy low.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
