Goodbye, 0-5 Buyer -OR- Finance a House or an Education?

We’re in the midst of a reset in the real estate market cycle. Every market is different, and we’ve been seeking “new normal” for quite some time.

0 to 5 Buyer:

Defined as the buyer who will buy a home and sell in under five years.

We’re witnessing the evolution of the new normal, not just in the Charlottesville real estate market, but across society as well. (search for “new normal” on RealCentralVA for context)

The buyers who would buy and sell in a zero to five year timeframe are gone. In other words, the stepping stone of the “buying a home” lifecycle has been pushed further.

First time homebuyers, when they do choose to buy, are buying at later points of their lives – once they’ve established themselves in their careers* and found their mates if they so choose, and have determined that their lives – kids on the way, jobs … have or represent some sort of stability.

Many of these first-timers have either seen their friends and families decimated by the housing market or have experienced it themselves in selling or trying to sell – either normal transactions, short sales or foreclosures.

Unemployment by County in Virginia
Virginia Unemployment Rates by County in June 2011

Charlottesville has a relatively stable economy (much more stable than many (most?) other localities around the country. We have always had underemployment, but we have a tremendous foundation – the University of Virginia, Defense Contractor industry (DIA and NGIC), SNL Securities, State Farm, Martha Jefferson Hospital, Crutchfield, Musictoday, Red Light Management and countless small entrepreneurial companies.

What does this delayed first-step in the real estate cycle mean?

Bluntly: the pool of homebuyers is smaller than perhaps ever before. And it’s likely to remain small for many years to come – perhaps the next seven to ten years.

It may mean that fewer transactions is the new normal, that the “trade-up” cycle of row house – to townhome – to single family home may be extended beyond 10 years, and be more of a 20-40 year cycle.

I’m curious – how many of the entrepreneurs in Charlottesville own their homes?

There’s only so much debt to be had, and the choice between housing and education is and is going to become more stark in the coming years (months?)

There are so many similarities and comparisons between the housing bubble and the education bubble, but I’d suggest starting with this informative piece at The Atlantic (which seems to be popping up much more frequently in conversations)

If you want to get a name as an economic seer, try this one. The next subprime crisis will come from defaults on student debts, starting with for-profit colleges and rising to the Ivy League. The parallels with housing are striking. In both, the written warnings aren’t understood, especially on penalties and interest rates. And in both, it’s assumed that what’s being bought will rise in value, in one case the real estate, in the other the salaries which will accrue with a degree. One bubble has burst; the second is already losing air.

Still, there’s a difference. With mortgage defaults, banks seize and resell the home. But if a degree can’t be sold, that doesn’t deter the banks. They essentially wrote the student loan law, in which the fine-print says they aren’t “dischargable.” So even if you file for bankruptcy, the payments continue due. Hence these stern word from Barmak Nassirian of the American Association of College Registrars and Admissions Officers. “You will be hounded for life,” he warns. “They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment.” He adds that any professional license can be revoked and Social Security checks docked when you retire. We can’t think of any other statute with such sadistic provisions.

And then there’s this from today’s Wall Street Journal: (bolding mine)

Gov. Jay Nixon of Missouri decried the expense of higher education, saying it forces many students to take on large student loans. Mr. Nixon said many college graduates spend five to 10 years repaying loans, and as a result cannot buy cars, homes or consumer goods.

A report last fall indicated that student debt in America had reached $850 billion, nearly $25 billion more than the nation’s consumer credit card debt load.

Homeownership is a long-term decision. Given the choice – which are the next (current) generation of homebuyers going to choose –

Higher education or a home of their own?

College Tuition vs Home Prices vs CPI

The new normal, for the foreseeable future, is one without the 0-5 year buyers, one with an extended lifecycle of homeownership. And you know what? If we can just get the government to get the hell out of the way – stop making secret loans to banks, stop toying with being landlords, stop catering to the banks, stop trying to manipulate mortgages, stop offering housing stimuli, hell, get rid of the mortgage interest deduction if you implement the Fair Tax at the same time and let the market work.

As a Charlottesville agent whom I trust said a couple years ago (paraphrasing): the market isn’t good or bad, it is, and we have to work in it.

That market is going to be one with fewer transactions because the first time homebuyers are going to wait longer to buy their first homes and these buyers are going to live in their homes for longer periods of time.

And that’s just fine.

sold listing volume - Albemarle County
Sold listing Volume - all properties - Charlottesville City

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