(Article by Lily Leung, The San Diego Union-Tribune – August 24, 2013)
Tina and Guiller Villafranca knew they had outgrown their 1,800-square-foot townhome in Eastlake when overnight family visitors crowded the property and Tina’s mother-in-law, who stayed there often, wanted her own suite to escape their allergy-inducing cat.
“It was just tight quarters. We had to get something bigger,” said Tina Villafranca, a 32-year-old registered nurse. The household also includes a 2-year-old son and a dog.
Through creative planning and lots of saving, the Villafrancas recently upgraded to a new single-family home in Chula Vista that’s double the size and more than double the price.
Move-up buying — virtually dead during the recession — has resurfaced in San Diego County. Property owners like the Villafrancas have been emboldened by rising home prices to list their homes and re-enter the market themselves.
Rising home values have meant more borrowers have emerged from negative equity, giving them the chance to break even or make a profit when selling.
San Diego County sales in the $300,000 to $800,000 range, generally the move-up category, rose nearly 50 percent in July compared with a year ago, figures from real estate tracker DataQuick show. Sales in the entry-level market, below $300,000, fell 25 percent in July, compared with a year ago.
Remaining home inventory also provides clues of a more-vibrant move-up market, said Norm Miller, real estate professor at the University of San Diego. The number of homes on the market between $500,000 and $800,000 is at a four months’ supply, which is “very, very healthy” compared with a year ago, when it was six to eight months.
Movement in the trade-up market “is important for the overall economy,” Miller said, because those sellers tend to pay more visits to home-improvement stores to get furnishings and appliances.
Move-up buying has historically been a tricky process. Should homeowners sell first? Or should they buy first?
The juggling act can get increasingly frustrating in the current market, where housing supply remains limited and unexpected blips in mortgage rates could doom deals.
Making sure the math makes sense is probably the first step in deciding if moving up is the right choice.
For the Villafrancas, their nearly yearlong transition kicked off with the sale of their four-bedroom townhome. They were so eager to move that they sold last fall at a loss of $5,000. The couple even covered the seller’s closing costs, which tacked on thousands more to their bottom lines, Tina said.
The couple lived with Tina’s in-laws for seven months to help them recoup their losses and continue saving up for a down payment on their next home. Everything finally jelled, including shedding a rental property, this summer, when they moved into their new home in Chula Vista.
They are a classic example of move-up buyers who have adapted to market conditions and the twists and turns involved in upgrading to more expensive real estate.
“Juggling all three transactions,” Tina said. “It’s been an interesting time.”
Determine home’s value
Figuring out whether the juggling act is worth it generally starts with finding the value of the home you plan to sell.
For some homeowners, recent home-price increases may mean they’re no longer underwater on their mortgages. That means they may be able to sell their homes for a profit or break even, which will help determine how much home you can afford.
A review of how much you make and how much money you owe also is key. Borrowers generally will need less than a 45 percent debt-to-income ratio to qualify for a fixed-rate mortgage, said JC Agajanian, a San Diego Realtor who has recently worked with move-up buyers and has a mortgage background.
The buying or selling question depends on your financial position. Some people may need to sell first because they would need those proceeds for the down payment of the future home. In the past, move-up buyers could get some flexibility with contingencies, where they would agree to buy on condition they are able to sell their own homes.
But contingencies have largely disappeared amid an increasingly competitive real estate market that may give sellers more ready-to-go buyers.
“In the climate we’re in, because things are absolutely feverish, sellers don’t have to subject themselves to locking up a contract and wait for a buyer to sell their property,” Agajanian said.
Buying and holding
Not all move-up buyers shed their starter homes. In some cases, they’re held as rental properties.
Sarah and Derek Motsinger, both 30, recently traded up to a single-family home in Allied Gardens from their two-bedroom, two-bath condo in University Heights. The couple is expecting a baby and they were ready for a yard.
But instead of ditching the condo, they decided to rent it. Jarred by the economic downturn, they saw their home as a safer investment than stocks.
“We thought it was a good time to hold and we’ll see how we can deal with it in the future,” said Derek, who owns a personal-training studio in Hillcrest.
Before making a move like the Motsingers, sellers should see if their lenders will count future rental income as income when calculating the mortgage, said Agajanian, the Realtor.
When the Motsingers bought their now-rental condo, they always intended on moving up and using real estate to build their wealth.
“That was always understood,” said Sarah, who’s a vice principal at a charter school in Chula Vista. “It would be a temporary place for you to live and an investment.”
Susan Anderson, a longtime real estate agent with Coldwell Banker, said she’s always been a proponent of property owners buying and holding, and then buying up, as long as the math pencils out.
She’s also noticed that the move-up market shows growth potential based on recent meteoric home-price increases in the past year.
Her office in Vista has even gone to calling clients who wanted to sell in the past three to six years but were unable to because they were unable to get bites in a weak market, she said.
“More people have the equity in the house so they can move,” she said.
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