Homeowners see a house as retirement nest egg, not an ATM
When Amy Lewis sits in her Lafayette, Calif., home, she can envision her three young daughters growing up there. She sees them forming lasting friendships with the neighborhood kids, graduating from the local schools, coming home for visits during college breaks.
It doesn’t stop there: The 43-year-old can also imagine grandchildren running around the halls.
It’s a different mentality than in years past, when people would buy a home, stay for several years and move up to something bigger or better. First and foremost, Lewis said she and her husband wanted an experience similar to one that they had growing up, one where the neighborhood kids went from preschool to high school together. Her parents still live in the same house they moved to when she was 2 years old (and they’re also flush with home equity in their 80s).
But Lewis adds there is another financial reason to staying put: Mortgage rates are very low, and there is a good chance it will be hard to trade in that monthly payment in several years.
“Definitely, for the next 30 years, we feel confident we want to be there,” Lewis said.
More home buyers today are planting deep roots in their communities, according to research from the National Association of Realtors. That’s especially true for buyers younger than 45 years old—those most likely to be move-up buyers, said Paul Bishop, NAR’s vice president of research.
In 2012, 27% of home buyers between the ages of 25 and 44 and 18% of buyers between the ages of 18 and 24 said that they planned to be in their homes for 16 years or longer, according to a NAR survey of 8,501 home buyers. In a comparable survey in 2006, 18% of buyers between the ages of 25 and 44 and 8% of buyers between the ages of 18 and 24 said the same.
Expectations have adjusted, and trading up is no longer the goal for many, Bishop said. People became accustomed to the move-up mentality when they’d see their neighbors move for extra square footage or a more desirable area. Now, your neighbors probably aren’t going anywhere.
“[Buying a home] is a very complex procedure—much, much more than before,” said Sherry Chris, chief executive of Better Homes and Gardens Real Estate, a national real-estate brand. “People are in it for the long haul, and it’s not just ‘I’m going to buy a house and see what happens in a few years.’”
Added Cara Ameer, broker associate with Coldwell Banker Vanguard Realty in Ponte Vedra, Fla.: “A lot of people tend now to think more logically than irrationally. They are really scrutinizing ‘do I need this?’ They’re looking at hard costs, and not throwing caution to the wind.”
For many homeowners, it is a matter of simple math, said Jeff Taylor, co-founder of Digital Risk, a mortgage processor. Today’s buyers are capturing mortgage rates near historic lows—and that’s allowing them to get “double the house” today compared with what they could get several years ago.
More exactly, “a $444,000 mortgage at 3.5% would carry the same payment as a $300,000 mortgage at 7%,” said H. Dodge Sumlin, senior mortgage loan officer with Fifth Third Mortgage in Atlanta, Ga.
Today’s buyers may never even have the desire to refinance in the years ahead, since doing so would likely increase their rate. The Mortgage Bankers Association predicts rates on the 30-year fixed-rate mortgage will rise to 4.8% in the fourth quarter of 2013, and to 5.1% in the fourth quarter of 2014. A decade from now, a mortgage obtained this year will likely look very reasonable, Taylor said, compared with what’s available in the future market.
What’s more, these days home values don’t appreciate at the same rate they did seven, eight or nine years ago, Ameer said. So people don’t plan on their home appreciating by $100,000 in two years, giving them the equity to move up to a bigger home.
That said, “as you’re paying that [mortgage] down and home prices appreciate, 10 to 15 years down the road, that equity will build,” Taylor said. “We’re going to see the home being the nest egg.”
Of course, some homeowners will be tempted to tap their equity during their tenure in the home. For that, those who buy today are more likely to turn to home-equity loans instead of cash-out refinancing, so as to keep their low mortgage rates, Taylor added.
Seeing into the future
The tricky part about buying a home to live in for decades is anticipating your needs at different points of your life.
Most importantly, make sure you’re buying in a prime location. A good school district might be important to you, or walkability to public transportation or shopping.
Another telltale sign of a neighborhood where you might be able to live for the long term: Blocks of homeowners who also have deeper ties to the community.
“Every area has those little places where no one moves. It can’t be replicated anywhere else,” whether the appeal is a good school district or highly sought after neighborhood amenities, Ameer said. Typically, “these areas are the best for that, for staying for a longer period of time.”
For Amy Lewis and family, their new neighborhood hits many of those points. In addition to good schools, there are many restaurants, mom-and-pop stores and ideal weather (without the kind of fog that nearby San Francisco gets). In fact, Lafayette almost feels like a “mini San Francisco,” she said.
“I grew up about 40 minutes from here, and it has a similar feel,” she said. “This is a perfect location.”
Amy Hoak is a MarketWatch editor and columnist based in Chicago. Follow her on Twitter @amyhoak.