When Demand Returns, What Shape Will It Take?

First-time buyers, without a home to sell, account for most of the action today, with trade-up buyers largely relegated to the sidelines. Looking forward, trade-up buyers may wait to recoup some of their lost paper equity before they make a move, even if their home is worth more than it was 10 years before. “Homeowner equity has been cut in half since 2006,” notes Kermit Baker, an economist with the Joint Center,

Low mortgage rates may paradoxically impede move-up activity. As Baker points out, it’s hard to find a homeowner who hasn’t refinanced at rates below 5 percent. As sales activity picks up, mortgage rates will inevitably rise—the Mortgage Bankers Association believes they will be at 5 percent by the end of the year. Will homeowners with a low rate on their existing home want to move? Many may run the numbers and figure that they are better off staying put than buying a new home at a higher mortgage rate. That state of affairs may take some steam out of the trade-up market.

Baker believes that this “lock-in” dynamic will stifle already-low mobility rates. In the mid-1990s, roughly one in seven households, about 17 percent, would change residences in any given year, according to data from the U.S. Census. That figure had dropped to about one in eight, or 12 percent, by 2008, and it has likely fallen further since then. Moreover, migration from one state to another, a phenomenon that has fueled decades of growth in Sunbelt states, has slowed to a trickle.

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Their incomes reduced, equity impaired, and prospects uncertain, it’s no wonder today’s buyers seem fixated on value. Housing, they’ve learned from the newspaper and even feature-length Hollywood movies, is no longer the safest and best investment on the planet. But it’s still the biggest. Instead of asking themselves how much house they can afford, prospects roll around in their heads how much they really need. Do we really need a home theater when we can put a big screen TV in the family room? Do we really want a fourth bedroom for guests when we could fit a bed in the home office? They question ornamentation. And they drive a hard bargain.

But memories are short, especially among U.S. consumers. Consider that full-sized SUV sales now outpace new-car sales overall. That’s after the gas scare of 2008 drove consumers to hybrids and other gas-conserving autos. There’s already evidence that American consumers, suffering from savings fatigue, are returning to restaurants, malls, and old spending habits. Before long, they may again aspire to buy the home of their dreams, even if it contains more than they actually need, especially if they believe, rightly or wrongly, that the home is likely to rise in value.