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The Evolution of Home Ownership
Once upon a time - just one or two generations ago - folks lived in their homes 15 or 20 years, or more. Many paid off their mortgages and stayed in their homes well into their retirement. Now, those who fit this home ownership profile are few and far between. Today, the typical homeowner sells his or her home every five to seven years and the average individual will move 11.7 times during his or her lifetime. While married couples still comprise the majority of homebuyers (62 percent in 2004), the second fastest growing segment of homebuyers is single women. These women are professionals who are juggling careers, children, and the needs of their aging parents. For both groups, their homes are their largest investment and they are willing to spend a good chunk of their capital to help preserve its value.
Home Improvements
A lot of money is at risk. Homeowners spent a whopping $224 billion on home remodeling in 2004, according to the National Association of the Remodeling Industry. Approximately three-quarters of that money was spent on improvements, while the rest paid for maintenance and repairs. According to researchers with Harvard's Joint Center for Housing studies, the average homeowner spends about $2,300 annually on home improvements. However, many folks are willing to shell out quite a bit more for larger-scale projects. Researchers found that 6.3% of these remodelers spent more than $20,000 on improvements while another 2.7% paid more than $35,000. Much of this money was earmarked for complete kitchen and bathroom makeovers. See how much a kitchen or bathroom remodel may add to your home's value.
The Second-Home Phenomenon
As folks move from one home to another (whether they're trading up, down, or simply following the best paying jobs), another interesting phenomenon is taking place. According to the most recent census estimates, nearly six percent of American households own a second home, typically within 150 miles of their main residence.
Most of these second-home buyers are folks in their prime wage earning years who are looking for an escape from their work week realities or an investment - or both. Many of these second homes are located near recreation areas, bodies of water, or mountains. While most second-home buyers purchase a seasonal home for the pure enjoyment of it, the red-hot real estate market of the past few years has generated home appreciation in these areas between 59 percent (Cape Cod) and 67 percent (Cape May). And though the market indeed shows signs of cooling, most second homes are situated on or near protected land. Because no new development is allowed, these homes are less commonly available and, therefore, fetch higher prices.
The Downside of the Upside
All this moving and second-home buying in the last several years has been fueled by a combination of historically low interest rates, sub-prime lending ( higher-interest loans to folks with poor credit histories), and nonconforming lending products such as "interest-only" loans. While all three have brought home ownership to an all-time high (74.5 million American families now own their own homes), the relationship between income and debt is strained for many people. As the interest rates creep higher, this becomes increasingly worrisome. See Bubble Trouble
Add to this strain the fact that many homeowners have extracted equity from their homes to consolidate large credit-card debt or pay for everything from home improvements to their kids' college, to cars and vacations, and you have a potentially disastrous financial situation for many families. As interest rates rise and the second phase of many variable-rate mortgage products kick in, consumers with these types of loans are faced with a big jump in their monthly payments.
Even with a traditional fixed-rate loan, many families are over-extended. Due to the laxity in lending underwriting standards over the past several years, many families qualified for higher home loans than their income can realistically support. Between 2000 and 2003, the number of American households spending more than 50 percent of their income on mortgage payments grew by 2.5 million, according to Harvard University's Joint Center for Housing Studies. In fact, today 1 in 8 Americans spends more than half of their income just keeping a roof over their heads. Check your debt-to-income ratio and find out how much equity you currently have in your home. If you're thinking of refinancing to a traditional fixed-rate loan, investigate your mortgage options.
Age and Circumstances
As homeowners today become empty nesters, they are more likely than their predecessors to start looking for smaller quarters. This is because their 2,800 sq-ft. home is now too large to care for ? or they're looking to downsize in order to cut costs.
Real estate agents showing smaller, one-level homes close to shopping and restaurants often find both first-time buyers and middle-aged or older folks at their open houses. Generally, there's more demand for lower-priced, smaller homes. This creates an interesting dynamic as move-down buyers find themselves in competition with first-time buyers for the same housing stock. And when demand exceeds supply, the prices tend to rise. This can come as a shock to those folks looking to trade down. They may find they actually have to pay more per-square-foot for a smaller home in their area than they would for a larger one. Check the square-footage and prices for homes in your neighborhood or an alternate location.
Because it's not always easy to find a suitable trade-down home, many older homeowners feel uncomfortable selling first, however many need the proceeds in order to finance their new home purchase. If they can't swing two homes temporarily, a good alternative is to sell, bank the proceeds, put the furniture in storage, and live in a rental until the right trade-down house comes along. Look for rental units in your neighborhood or an alternate location.
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