Where Are the Move-Up Home Buyers?

Lane Oatey | Getty Images

Housing has never been more affordable, and yet home ownership is still falling and more Americans are renting. The supply of homes for sale is down 24 percent from a year ago, according to the National Association of Realtors, but that still doesn’t explain why so few buyers are jumping in. The answer lies in the immobile move-up buyer.

“At current mortgage interest rates, the monthly cost of the typical new mortgage – at about 12 percent of median income – is not much more than half normal levels,” notes Paul Diggle of Capital Economics. “In other words, housing is very affordable.”

Still, while mortgage refinances soar to a two-year high, weekly numbers from the Mortgage Bankers Association show that applications to purchase a home are down by 6 percent over the past year.

Jason and Pascale Royal would love to move up to a bigger home. With a new baby and a dual income, they are even willing to pay more for a bigger mortgage. The trouble is, the mortgage on their south Florida home is about $100,000 more than the home is currently worth. To add insult to injury, they can’t get any help from the bank or the government.

“Because we’ve been current on our payments and have never been late or missed one, we don’t qualify for any of these short sales or any of these special programs to help underwater borrowers,” says Jason Royal.

Jason and Royal are among 11.4 million borrowers, or nearly 24 percent of all residential properties with a mortgage, that are currently in a negative equity position, according to CoreLogic. In addition, 2.3 million borrowers have less than 5 percent equity, referred to as near negative equity. But mortgage analyst Mark Hanson takes it one step further, adding that most move-up buyers need to just 6 percent extra to pay the Realtor, but 20 percent to put down on the next mortgage. He therefore puts real or “effective” negative equity at 80% loan to value; that is, you probably need about 20 percent equity in your current home to move up. He calculates about 25 million borrowers don’t meet that amount of equity. That’s twice as many underwater borrowers as most analysts and politicians purport.

“Investors and first-timers have come in and out of the market throughout history at various times for various reason, but underpinning housing has always been move-up/across/down buyers,” says Hanson. “Half of the repeat buyers have died. They are down for the count due to negative equity, "effective" negative equity, low quality credit, or legacy 2nd liens they can't extinguish. This is a huge problem for anybody betting on ‘escape velocity’ or a ‘durable recovery’ in housing.”

The Royals could just walk away, as many like them already have. The Obama administration has been pushing its program that pays lenders to slash mortgage balances, but this week the regulator for Fannie Mae and Freddie Mac said the two mortgage giants will not participate. The administration claims reducing principal will keep borrowers from walking away. Fannie and Freddie’s regulator, Edward DeMarco, claims offering principal reduction will cause current borrowers to miss payments just to qualify. The Royals appear to prove both of them wrong. They won’t walk away and they won’t stop paying.

“I bought this house, I sat down, I signed the paperwork, I knew the numbers, and so I've made my payments as committed, and I don't want to stop paying to create a situation where the bank wants to get me out of the house. I'd rather do it in a way that's fair to both parties,” says Jason.

But the Royals also won’t move, and therefore won’t be able to contribute to the housing recovery.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick