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LETTERS : 'Move-Up Buyers'

October 25, 1992

I read with interest California Trends ("Slowdown in Demand by Move-Up Buyers Has Effect on Total Market" Oct. 4). In my opinion, the economist missed the real point as to why the move-up buyer has disappeared from the real estate scene.

From the end of World War II until the latter part of 1989, it seemed axiomatic that home prices in California rise in value over time. And even with a two-year experience of declining prices, expectations for a turnaround continue to be harbored by many property owners and real estate brokers.

Granted there is a small segment of the real estate market that is represented by those seniors leaving the state for personal economic reasons; also the recessionary state of the California economy is a contributor to the stagnation of the current residential real estate market. But perhaps an examination of the economic patterns of the past will provide a focus on the primary reason for the lack of move-up buyers.

Past trends for young first-time buyers required scraping up a down payment, usually saved, borrowed from family or subsidized by VA or FHA. Over time their property increased in value as their incomes increased. Thus, inflation enabled the move-up buyer" to not only increase the amount of money he or she could place on a down payment through the sale of their house, but inflation also contributed to the amount of debt he or she could shoulder through salary increases. Consequently, as housing prices rose, there was a demand for move-up homes from this market of existing homeowners.

In the buying frenzy of the late 1980s, the California residential real estate market resembled the "pyramid schemes" of the 1970s--those who bought in at the end of the run saw their perceived equities dissipate to a point that in many cases more is owed than their property is worth. This is one factor that has contributed to the savings and loan debacle.

The real estate market is a curious duck as markets go. In the commodity and stock markets, massive amounts of product, share or debt are traded on a daily basis; this opposed to a residential real estate market that is measured by three or four houses selling in a neighborhood over maybe a year's time.

Probably the biggest fallacy advanced by brokers and believed by homeowners over the years was that trading up would ensure a major contribution to retirement. And for many years, it was the case; back to the pyramid schemes, there were people who walked off with the cash.

The point of this thumbnail sketch of the California residential real estate market is that the capital formation provided by inflation is gone. Where is the typical "move-up buyer" going to acquire the necessary capital to satisfy a down payment of a larger home if his or her existing home has lost its equity? There are a few, no doubt, that will hit it in the stock market, win the lottery or improve on the mousetrap. But these numbers are surely smaller than during times past when a night's sleep in an owned home contributed to a "move up."


San Clemente

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