The question is where is the next wave of homeowners coming from to restore equilibrium in the housing market? The answer – the same younger generation, currently content to rent, and the middle-market household lacking the confidence to shoot for a larger home, will provide the buying power that will lead to positive market shift. The secret in moving the cycle lies in changing the psychology of these consumers.
For example, the “psychology” of the typical millennial (content to rent) household is obviously influenced by today’s new economy that tells them renting today is more sensible than owning. The concept of residential real estate as an asset has been displaced in this segment’s mind by news of millions of borrowers underwater with mortgages, and falling home values. The middle-market homeowner’s mindset, also viewing the negative aspects of the current market is preventing that segment from “moving up.” Both millennial and middle-market owners could be deceiving themselves. Here’s why:
Using the example of an average millennial couple with an annual gross income of $75,000 paying $1,000 toward rental housing compared to a monthly mortgage of $1,500, the couple would expect to see equity of approximately $21,422 over a 5-year period when they buy a home valued at $250,000. (This assumes a 30-year fixed mortgage at 4.5% with 3% down payment, and would hold true in either a stagnant or appreciating home market.) Even given the transient nature of today’s younger households, after just 2 years, the couple could expect to see $8,004 in equity compared to $25,560 they would have paid in rent with nothing to show in return for that money. In addition, borrowers should expect to see tax benefits resulting from the current, existing IRS mortgage interest deduction rules.
For existing homeowners, there are several sentiments to overcome. Concerns about equity position on the sale of their current home as well as trepidation about the ability to qualify for a new home mortgage can discourage current homeowners from pursuing their interest in “moving up.” The truth is, move-up homeowners are just as capable of reaching their goals today as they were several years ago. With mortgage rates at historic lows, and property affordability at higher levels, homeowners who desire to move up only need to speak to their CPA or an experienced loan agent who will run the numbers to see how the money they’re spending on their current mortgage could actually buy them “more house.”
For the cycle of home ownership to return to a fluid state where buyers at all levels are able and willing to participate, a major shift in thinking is required. This shift can be achieved by educating both new generation buyers and established homeowners on how the current real estate landscape does, indeed, provide opportunities to achieve the American dream regardless of where they are in their life cycle.
Kirk Jaffe is Executive Vice President, Originations for Peak Finance Company - Residential. Jaffe oversees the consistent growth of a mortgage broker/banker and asset based lender. Through his expertise in commercial, residential and asset based lending, Jaffe seamlessly integrates these areas into a one stop financing solution for homebuyers and property investors. Mr. Jaffe is the publisher of two books and is the residing President of the Universal City/North Hollywood Chamber of Commerce. In his spare time, Mr. Jaffe enjoys cooking, skiing and reading.
Kirk can be reached at kirk@peakcorp.com.
