Case of the Missing Equity . . times Millions?

As a realtor, I think of housing as an escalator that roughly corresponds to people’s life stages.

In your 20’s, you buy a condo or starter home. When (and if) you get married, you and your partner buy a small family home. When (and if) you have more money and start having kids, you move up to a bigger home.

A couple decades later, after the kids have moved out and you’re an empty-nester, it’s time for less space, often a town home or condo.

Finally, when health issues predominate in later life, assisted living may be appropriate.

What’s that got to do with today’s housing market?

In many markets, the housing escalator is stuck — or broken. Just as global economies and equity markets are now interconnected, a malfunction in one part of the escalator has consequences for all the other parts.

Broken Escalator

Until now, by far the most attention has been focused on the escalator’s beginning rungs. That’s where first-time Buyers with marginal credit made their first step onto the housing escalator — and promptly got thrown off, or stuck.

The reasons and fallout have dominated the news for well over a year now: aggressive, “gotcha” loans to people with marginal credit; loose lending standards; overheated housing markets that are now plagued with an overhang of both existing inventory and new housing.

However, much less remarked is what’s happening at the escalator’s more advanced rungs. In particular, many elderly home owners are also suffering fallout from a broken escalator.

The New York Times just ran an excellent story exploring this phenomenon titled, “In Housing Slump, Elderly Forgo Assisted Living” (11/21/08):

As a realtor, I just witnessed something similar in the course of selling a Minnetonka town home.

The town home was a perfect downsizing choice for someone who no longer needed a big, single family home — exactly my client’s circumstances when she and her husband purchased it 20 years earlier. Now, as a widow approaching 80, it was time for the next “rung” on the elevator: a condo in a new, full service building with nice amenities, true one-level living (vs. stairs), and less living space.

The Case of the Missing Equity

As a listing agent, I tailored my marketing to prospective downsizers, and had no trouble generating traffic at my numerous open houses. Although I heard the occasional negative feedback, by far the most reaction was a wistful, “this is exactly what I’m looking for. I just wish I could afford it.”

Given that most of these people had been homeowners for decades, and the townhome’s relatively modest price, my reaction was a dumbfounded, “hunh??” Weren’t their homes long paid off?

The surprising, all-too-frequent answer was, “no.” Many, many of “The Greatest Generation” had taken equity out of their homes, to the point where their ability to finance even a less expensive property was jeopardized. Even if they hadn’t taken equity out, they were concerned about what their homes would fetch in a soft (and deteriorating) market.

(Just as an aside, if the home equity had gone towards expensive toys and consumption, I didn’t see it: most of the 60-something’s coming through my open houses were conservatively dressed, driving older model cars, etc.).

My client’s town home finally did sell, but the market time was relatively long, and the price, although consistent with the new market reality, disappointing. As I told my client, it’s one thing to wonder if you sold too low when it sells in a week. However, after 8 months on the market, 7 Sunday open houses, 3 broker opens, print ads, volleys of mailings to the neighborhood, and more than 50(!) showings . . . you don’t have to worry about that.

Multiply my client’s experience by a couple million and you have today’s real estate market.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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