Death of the Starter Home?
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A Brilliant marketing executive came up with the idea of promoting the “Starter Home” (not to be confused with the “starter wife”). Buy a small home or condo… stay in it for two to four years, use the increase in value, “equity,” and buy a bigger a house.
Problem is an assumption was made: Maryland home prices will go up! And why not? Real estate went like 60 years without 1 annual drop nationwide. It was a no brainer. But when people don’t think, bad things happen.
If prices don’t go up, homebuyers are stuck. I know a ton of friends that are underwater and can’t upgrade. Not only do you need prices to go up enough to pay for a larger down payment, you have to overcome those damn Realtor fees (sure you could sell it yourself, but read my “Save $20,000” FSBO post).
So prices have come down. Now what? Many reply “But prices are down, so they can only go up!” Yeah right. Not to scare you, but it can always go down.” I’m not talking nuclear bomb .000001% chance, I’m talking real human chance.
So, what is the answer? I really don’t know. I just wanted to people to be aware. Here are some possible solutions.
- For those that are now considering buying (should you hurry for the tax credit?):
- RENT (Watch my 2007 Don’t Buy Video). Yeah, just lie to your friends that say “so do you own this place?” It is none of their business. I’ve always thought that asking that is kinda like asking “what’s your salary?” Renting is still much cheaper than buying (usually). Save money and maybe buy a bigger home you can stay in for 7-10 years.
- Buy now, but truly understand this is real and risky. (And those that say “I’ll just rent if I need to move out,” that doesn’t work so well).
- S T R E T C H . As painful as it may be, it might be less risky to skip the starter home and find a place you can stay in for a longer period. Sure I make less money (assuming you buy both the starter house and the next house with me) but you get to skip a set of Realtor Fees and avoid the “if it goes down we can’t move” risk. See my older post Buy Bigger! You’re Only Borrowing It Until You Sell It!
Disclosure (or is it a “disclaimer,” sorry bad insider Realtor joke). Don’t be silly and overextend into the danger zone. However, 95% of my clients consider themselves to be “Ultra Conservative” with money. Yet versus what the national average, or what a bank says they can buy, they aren’t. For example, the bank might approve $800,000 for a 30 year fixed, but they want to remain conservative and buy a $600k home. I’m just playing devil’s advocate. That buying a shorter term home might be more risky and more expensive in the long run.
For those that already bought a few years ago and feel STUCK.
- Take a loss. This might not be possible for some, and sure it is painful, but don’t forget you are likely buying “UP.” So sure you are selling your place for a $30,000 loss, but hopefully you are buying a place that is $60k-$80k less than a few years ago. It all washes out.
- RENT AND RENT. Seems obvious, but when I mention it to the “stuck,” it is like a light goes off (or is it “on”). Can’t take that loss, then rent out your place, and move into (rent) a bigger place. The difference per month is just what it costs to get a bigger place.
- RENT OUT and BUY. I call this the DOUBLE DOWN. I really don’t like this option. WAAAAYYY too risky in my opinion (but I’m not buying the house, you are). This is where a buyer is underwater on their house, and they don’t want to sell it. They instead want to buy ANOTHER house, thus owning two houses. This doubles, or triples, their real estate exposure. Because “things can’t get any lower than this!” Again I warn people about taking this route.
So, still want to buy that 1 bedroom condo or townhouse? Great! Not a problem. At least you are more informed and not following any brainwashing or peer pressure. And sure I’ll help you. I love working with informed buyers. Nope, never too busy for you (video).
For those that have been asking for an update on my AU Law School studies. Things are going great. Moved to the day program, taking Cyberlaw, Trademark and a few others.
Here is another video from my recent Africa trip. Sandboarding video while talking about the “POPCORN” Agent (make sure you subscribe so you don’t miss that post)
Written by Frank- Broker FranklyRealty.com
Please report typos. Please get your NVAR Realtor to vote today (before 10/09) at ChooseFrank.org. Cicada photo by marlb0r0 man, Devil by gruntzooki, Stuck by NeilsPhotography
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Rent and rent I think is the most overlooked of all those options, and yet I think it’s a really good one. It accomplishes what the owners want, (to get out of their tiny place and into something more appropriate for their growing family, or lifestyle or whatever) while avoiding what they don’t want to face or don’t have the cash to face, of realizing a loss on the starter condo.
We tried to advise someone on the blog to do that last year, but I don’t think we convinced them.
The NYtimes or Washington Post had an article on the 7 new rules for buying. One of which was very similar to the idea here, buy best or buy cheapest. If you can afford your dream house now, go ahead and buy it, but if you can’t don’t buy the next best thing and be paying out way more in monthly housing costs than you have to and have higher utility and transaction costs to boot while still not having the home you really want, buy the cheapest thing that will meet your needs for the next 5-10 years and save like a bandit.
In relationship to what you said here, I’d add if you only buy a $150k home, you can only lose $150k. (plus carrying costs…). The problem really is that a lot of these starter condos were not $150k, they were $350k or more. That’s the rub.
Hi Frank,
Just doing my daily required reading of your blog. Again, good work
as always. People down here in South Florida are simply “buying, buying, buying”. I agree that renting is the least risky bet. Here’s to informed buyers. By the way, we just started using your Client Bill of Rights and the buyer/broker agreement this weekend. Thanks for all of your counseling to a fellow Realtor!
i wonder if people have considered maybe buying isn’t the best thing they can do? with most people have to move to be able to move up in their career?
It’s been a year since your original post and it’s only become more true in that time. Renting makes so much sense for so many people. Until the market stabilizes at some level (which probably won’t happen for another 2 years) renting is a solid option. BTW, I really like the design of your site. I haven’t visited before but will be back for sure!
[…] days of the starter home are dead. As declared in my 2009 blog post Death of the Starter home still holds true. (My older blog posts are sometimes better, unlike cars, my posts keep their […]