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Homeowners who want to trade up are stuck waiting

Before the bust, rising prices fueled the housing market, enabling buyers to start small and climb the ladder. Now that promise of upward mobility has been all but shattered, gumming up the market.

August 01, 2011|By Alejandro Lazo, Los Angeles Times
  • "The idea that you move up, and that it is automatically a good investment  that is crazy," says Dean Baker, co-director of the Center for Economic and Policy Research.
"The idea that you move up, and that it is automatically a good investment… (Jae C. Hong, Associated…)

Back in the frothy days of 2007, Luciano Mor needed only a weekend and a Craigslist ad to find a buyer for his two-bedroom starter home.

The split-level house, on a quiet Silver Lake street, sold for $749,000, commanding nearly twice what he paid in 2002 and about $50,000 more than a real estate agent had suggested as a listing price. Mor, who works for Vans' apparel division, had planned on taking the gains and snapping up a place closer to his job in Cypress with enough room to accommodate an expanding family.

It was the kind of life progression that traditionally fuels a healthy housing market. Then prices started to drop. Nearly four years later, Mor is still looking for the right deal.

"I just feel like the longer I hold off, the better I will be," Mor said, sitting in the living room of the Long Beach home he and his wife rent. "It's almost like getting a new car — you just know it's best to hold on to your old car as long as possible."

Potential move-up buyers like the Mors are largely sitting on the sidelines these days, leaving a key part of the housing market stuck in neutral. The promise of rising prices and upward mobility, once a powerful force in the American housing narrative, has been all but shattered by the downturn.

"The move-up market is a conveyor belt, and everyone moves up a rung, but that has kind of gotten gummed up during the housing recession," said Stan Humphries, chief economist of the real estate website Zillow.

Although there is no way to precisely to track move-up buyers, such shoppers often are looking in the $300,000-to-$800,000 price range, according to San Diego real estate research firm DataQuick.

Home sales fell the most in that category in June, dropping 25.5% from June 2010, mainly because buyer tax credits last year sparked so many first-time purchases, DataQuick said. All those first-time purchases fueled move-up transactions.

By comparison, sales of homes priced below $200,000 fell 11.4% from June 2010, and sales of homes priced at more than $800,000 dropped 17.6%.

Before the bust, moving up was so common that chains of buyers and sellers would develop, with each deal dependent on the previous one in the chain. Move-up buyers are a key part of a more robust market, as all that trading up fuels price gains and helps homeowners to build equity.

"It is critical," said Ed Leamer, director of the UCLA Anderson Forecast. "The way to think about is a chain of trades that normally occurs, and if that chain is broken at any point, or it doesn't begin because you don't have enough entry-level buyers, then the whole dynamic of the marketplace is affected and the level of resales is going to be very small."

Dean Baker, co-director of the Center for Economic and Policy Research, said the move-up market got out of hand during the boom, with too many people taking on more debt than they could afford. Even in a more normal market, moving up is not necessarily the best option for homeowners who could put their money to use in other places.

"For the longest time, people took it for granted that prices would go up, and, particularly over the last decade, they assumed prices would go up fairly rapidly," he said. "The idea that you move up, and that it is automatically a good investment — that is crazy, and if people think more clearly about what they want to do, that is going to lead to making better decisions."

People appear to be thinking carefully about their next housing moves, said Beryl Henry, a Lakewood real estate agent who remembers that chains as long as seven weren't unusual before the bust. These days, her sellers are more likely to be scaling down rather than trading up.

"I personally am not seeing the move-up buyer," Henry said. "I don't remember the last time I have even seen a chain of three."

Some homeowners are afraid to look for something bigger or better because of high unemployment, a shaky economic recovery and the fear that prices have yet to stabilize. Many can't get a mortgage that would cover the cost of a move-up home. And others are "underwater" on their mortgages, having watched housing prices fall so far that their homes wouldn't sell for enough money to pay off their debt.

The declining real estate market and poor economy in Northern California's Shasta County have kept Michael Cox, 40, and his wife, Carrie, 35, from moving out of their first home, a three-bedroom, two-bath house they bought in 2003. Shasta County was hit hard by the recession and continues to suffer in the recovery, with the unemployment rate standing at 15% in June.

"We had more kids," Cox said. "We just wanted to upgrade and move up to that next level like everybody else does."

The couple put their home on the market in 2008 but got no takers. They aren't underwater and can afford their mortgage payments. For now, they are simply stuck.

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