Andrew Cordell bought his first home at the worst possible time — 10 years ago, right before the housing bubble burst.
He's not going to make that mistake again.
"We had immediate fear put in us as homeowners," says Cordell, 40. "We know how dangerous this can be."
So the small "starter home" he purchased in Kalamazoo, Michigan back in 2007 now feels just about the right size.
"When we bought, we figured we'd get another home in a few years," he says. "But the more we settled, the more we thought, 'Do we really need more space?' We don't actually need a large chest freezer or a large yard. Kalamazoo has a lot of parks."
Apparently, plenty of homeowners feel the same way.
It's a phenomenon some have called "stuck in their starter homes." Bucking a decades-long trend, young homeowners aren’t looking to trade up — they’re looking to stay put. Or they are forced to.
According to the National Association of Realtors, "tenure in home" — the amount of time a homebuyer stays — has almost doubled during the past decade. From the 1980s right up until the recession, buyers stayed an average of about six years after buying a home. That's jumped to 10 years now.
Other numbers are just as dramatic. In 2001, there were 1.8 million repeat homebuyers, according to the Urban Institute. Last year, there were about half that number, even as the overall housing market recovered. Before the recession, there were generally far more repeat buyers than first-timers. That's now reversed, with first-time buyers dwarfing repeaters, 1.4 million to 1 million.
This is no mere statistical curiosity. Trade-up buyers are critical to a smooth-functioning housing market, says Logan Mohtashami, a California-based loan officer and economics expert. When starter homeowners get gun-shy, home sales get stuck.
"Move-up buyers are especially important ... because they typically provide homes to the market that are appropriate for first-time buyers," he says. When first-timers stay put, the share of available lower-cost housing is squeezed, making life harder for those trying to make the jump from renting to buying.
Getting unstuck from your starter home
There are plenty of potential causes for this stuck-in-a-starter-home phenomenon — including the fear Cordell describes, families having fewer children, fast-rising prices, and flat incomes. But Mohtashami says the main cause is a hangover from the housing bubble that has left first-time buyers with very little "selling equity."
Buyers need at least 28 to 33 percent equity to trade into a larger home, and often closer to 40 percent, he says. Those who bought in the previous cycle might have seen their home values recover, but many purchased with low down payment loans, leaving them still equity poor.
That wasn't such a problem before the recession, as lenders were happy to give more aggressive loans to trade-up buyers. Not any more.
"In the previous cycle you had exotic loans to help demand. Now you don't. [That's why] tenure in home is at an all-time high," Mohtashami says. "Even families having kids aren't moving up as much."
Fast-rising housing prices don't help the trade-up cause either. While homeowners would seem to benefit from increases in selling price, those are washed away by higher purchase prices, unless the seller plans to move to a cheaper market.
"You're always trying to catch up to a higher priced home," Mohtashami says.
Cassandra Evers, a mortgage broker in Michigan, says she's seen the phenomenon, too.
"It's not for lack of want. It seems to be the inability to afford the cost of the new home,” she says. “It's not the interest rate that's the problem, obviously because those are at historic lows and artificially low. It's because to buy a ‘bigger and better house,’ that house costs significantly more than their current home. The cost of housing has skyrocketed."
There's also the very practical problem of timing. In a fast-rising market, where every home sale is competitive, it's easy to lose the game of musical chairs that's played when a family must sell their home before they can buy a new one.
"Folks are concerned about selling their current house in one day and being unable to find a suitable replacement fast enough," Evers says.
Cordell, who lives with his wife and eight-year-old son, says the family considered a move a few years ago and briefly looked around. But they quickly concluded that staying put was the right choice.
"We looked at some homes and we thought, ‘I guess we could afford that. But we don't want to be house broke’,” he says. “We don't want to take on so much debt that ‘What else are we able to do?’ What if one of us loses our job? I guess you could say we have a Depression-era sensibility. … Who would want to get upside down on one of these things?”
The Urban Institute says this stuck-in-starter-home problem shows a few signs of abating recently. Repeat buyers were stuck around 800,000 from 2013 to 2014. Last year, the number pierced 1 million. But that's still far below the 1.5 million range that held consistently through the past decade.
There are other signs that relief might be on the way, too. ATTOM Data Solutions recently released a report saying that 1 in 4 mortgage-holders in the U.S. are now equity rich — values have risen enough that owners hold at least 50 percent equity, well above Mohtashami’s guideline. Some 1.6 million homeowners are newly equity rich, compared to this time last year, and 5 million more than in 2013, ATTOM said.
“An increasing number of U.S. homeowners are amassing impressive stockpiles of home equity wealth,” says Daren Blomquist, senior vice president at ATTOM Data Solutions.
So perhaps pent-up repeat homebuying demand might re-emerge. Evers isn’t so sure, however.
"Most folks I talked with are no longer interested in being house poor and maxing out their debt to income ratios. They seem to be staying put and shoving money into their retirement accounts," Evers says.
The Cordells are content where they are in Kalamazoo and plan to stay long term. If anything would make them move, it’s not growing home equity but a growing family.
“If we ended up with a second (kid), I suppose we'd have to look,” Cordell mused. “But we have no plans for that.”
4 Signs You’re Ready to Trade Up Your Home
- YOU'VE GOT PLENTY OF EQUITY: Your home’s value has risen enough that you safely have at least 28 percent equity and, preferably, more like 35 to 40 percent.
- YOU'RE EARNING MORE: Your monthly take-home income has risen since you bought your first home by about as much as your monthly payments (mortgage, interest, insurance, taxes, condo fees, etc.) would rise in a new home.
- YOU STAND TO MAKE A HEALTHY PROFIT: You are confident that if you sell your home, you’d walk away from closing with at least 30 percent of the price for your new home — or you can top up your seller profits to that level with cash you’ve saved for a new down payment. That would let you make a standard 20 percent down payment and have some left over for surprise repairs and moving costs that will come with the new place. Remember, transaction costs often surprise buyers and sellers, so be sure to build them into your calculations.
- YOU CAN HANDLE THE RISK: You have the stomach for the game of musical chairs that comes with selling then buying a home in rapid succession. Also, if you are in a hot market, you have extra cash to outbid others or a place for your family to stay in case there’s a time gap between selling and buying.