First-Time Home Buyers Accept Attached Units
Economic realities of the present housing market are dictating dramatic changes in home selection and distorting the Great American Dream.
As home financing has changed so drastically, in a myriad of mortgage types, buyers’ expectations are changing of necessity, turning to smaller, attached dwellings, especially for the first-time buyer.
Builders know that post-World War II babies, in the third decade of their lives, represent a vast market of potential buyers stymied by high prices and interest rates from buying their dream houses, not as their privilege but as their inherent “right.”
First-time buyers are estimated to represent a hefty 40% of all those who buy new homes. Most of them realize that they will not be buying the kind of house in which they grew up.
“They are willing to live in smaller, attached homes with small yards as long as the price is reasonable, the mortgage is manageable and the location is good.”
That assessment is from the Research Network Ltd., an Irvine-based realty and economics consulting firm. It undertook a survey among more than 300 homeowners living in Los Angeles, Orange and Riverside counties in dwellings containing from 672 to 1,605 square feet of living space priced from $50,000 to $137,000.
Matt Disston, a principal in the firm, said the study showed that the traditional desire for a single-family, detached home is waning, just as the dream of owning it is fading.
The most important single factor in shopping and making the decision to buy, of course, was the affordability of the monthly nut--the mortgage payment. That usually entailed two incomes and if that was not enough, there was no point in even going to the company store.
House price and location were next in order of importance to those surveyed last November.
In a multiple choice question, 44% of the survey participants cited building equity as the “major motivation for buying a home,” followed by tax benefits, 43%, and “tired of renting,” 31%.
Disston finds it noteworthy that these buyers still consider building equity as a major reason for purchasing a home, since there has been little if any appreciaton of homes since the 1980-81 start of the recession.
“But new home buyers appear undaunted, or uninformed,” about that, Disston added. “They rationalize their buying decision by convincing themselves that their home will increase in value, even though fundamental economics in today’s housing market prevent any meaningful appreciation.
“I’m sure they draw support for their rationalizations from other new homeowners they know and from sales agents. It is significant that 84% of the buyers surveyed said they thought home prices will keep pace with, or exceed, inflation. Of course, that’s not all that much based on the low inflation rate (3.7%) recorded last year.
“Valid or not this perception that homes purchased today will increase in value, is crucial to the health of the housing industry. If prospective home buyers continue to believe their housing investment will provide them with a reasonable rate of return, they will continue to buy. And eventually their investment will increase in value but not at the rate of the late 1970s.
“However, the appreciation does not come close to the 25% annual rate recorded in some cases during 1977-80. A lot of new home buyers are probably hoping against hope that the ‘good old days’ of double-digit appreciation will return but for the foreseeable future, we know it won’t.”
The tax incentives associated with home ownership will continue to provide home buyers with some financial relief but could be disastrous to the housing industry if such benefits are ever discontinued, Disston noted, and although mortgage rates have eased a bit, the carrying costs of buying a new home are still quite heavy and the promise of tax breaks is the only assured factor in today’s housing market that makes the purchase of a home economically logical.
“The strong feeling of home buyers surveyed--that they were simply tired of renting--gets right to the heart of what motivates people who consider purchasing a home in the first place . . . even if it doesn’t make a lot of economic sense.
“It’s the Great American Dream at work. People get tired of living in someone else’s building without control over their own housing destiny. They want to be able to put holes in the walls, keep pets, paint rooms in wild colors, build book shelves and do whatever people do in their own homes.
“Although their mortgage payment will probably be substantially more than their rent payment, and their new home may be somewhat smaller than their apartment, they don’t seem to be concerned. Forget the economics; a person would rather pay $1,300 a month for their own home than $800 a month for a comparable rental unit, even though it might take years for the rent to get as high as the mortgage. They rationalize the difference by hoping for appreciation and by counting heavily on the tax breaks,” he believes.
The survey brought into focus the “great strength” and the “great weakness” of today’s housing market for the consultant.
“The strength is reflected in the constant hope of new home buyers that their home will increase in value even though it probably won’t as quickly as they want it to. And the weakness is the vulnerability of the tax benefits which are a key factor in the home buying decision. If these incentives are terminated by the government (as threatened during each new session of Congress) it would have a tremendously detrimental effect on the housing industry,” he concluded.
Three out of four of the respondents were first-time buyers and their median age was 29 years. The median age for move-up buyers was 37 and the median for all respondents was 30. They were able to partake of the affordable housing offered by builders in those three counties, in some cases where local government bond programs were used for below-market rate mortgage funds for buyers who qualified under income and other conditions.
In another phase of the study, Disston and Pam Wooldridge, another principal of the firm, noted that questions about distances between homes and jobs evoked a typical California motorist reply. Never mind the distance--it was the time spent getting to and from one place to the other that mattered.
More than 90% of the Orange County home owners said the only locale they considered was in that county. In Riverside County, 46% of those interviewed said they considered Orange County homes before settling in Riverside County. Most of the first-time buyers, regardless of where they lived, work in Orange County because jobs there pay more. Consequently, more people can afford to buy their first home.
Home buyers had to make sacrifices to buy their homes. In Orange County, for instance, 19% of the buyers had to revise their family budgets to accommodate the monthly mortgage payment; 14% acknowledged that they moved into a smaller house than they preferred.
But apparently condominium residents are better prepared to make the transiton to “small homes.” Those who moved out of the condominiums readily opted for more compact living, accepting the detached home rather than the single-family dream house.
