People shopping for houses today are unwilling to purchase substandard housing in hopes of trading up at some later date.

Houses are expensive. Many renters would like to buy a house, but they lack the down payment necessary, and many renters are early in their careers when their income isn’t high enough to purchase a home they would really like. As a result, first-time homebuyers purchase the least expensive properties available for sale in the housing market, using the highest-cost financing (generally FHA) due to their small down payment.

Assuming they sustain ownership, assuming they utilized an amortizing mortgage, and assuming house prices rise, after some period of waiting, the first-time homeowners could sell their starter house—usually to another first-time buyer—for enough to cover the sales costs and provide a 20% down payment on a move-up house.

With 20% down, the first move-up buyer has access to lower-cost conventional financing, and since several years have passed since their first purchase, they often have a higher qualifying income. Combine these two factors, and first move-up buyers can outbid first time buyers by a significant margin, and they ignite the chain of move ups that reverberates through the market.

Prior to the housing bust, people felt an urgency to buy real estate because they falsely believed that real estate always goes up. They would buy whatever was available, even if it was terribly undesirable, because they wanted to climb the property ladder. Now that people realize house prices can go down, they aren’t eager to buy a property they don’t want in hopes of obtaining one they really do want later on. (See: The surprising change in buyer behavior caused by the housing bust and Housing bubble’s defining delusion: real estate only goes up)

Does this mean the property ladder is broken?

A new survey from Bank of America finds that, for many, the first home is no longer a starter home.

By Kayla Devon, April 07, 2016

The standard starter home is disappearing. … Braun Research recently surveyed 1,000 adults in the U.S. who want to buy a home in the future, and it turns out they’re not willing to settle for something that’s not quite right. According to the survey, first-time buyers today want a home they can grow into (75%) and would rather wait to save more money for a nicer house in the future (69%). When asked why they haven’t purchased a home yet, 56% of respondents said they didn’t think they could afford a home or the type of home they want –

This is a major departure from the attitude before the housing bust. People would buy something—anything—to start climbing the property ladder. Perhaps this was a rational behavior considering prices were rising far faster than incomes, but during the bubble, this false urgency prompted many people to use toxic affordability products, which is largely what caused house prices to rise faster than incomes. The feedback loop prompted a cycle of foolish buying, increased desperation, and widespread proliferation of unstable loans that ultimately became a Ponzi scheme.

Apparently, people simply aren’t willing to play that game any longer.

only 34% said it’s because they’re still paying off debt.

A third of the potential buyer pool is still a significant number. Further, just because they didn’t list paying off debt as a priority in this poll doesn’t mean they aren’t debt burdened and need to pay off debt before they buy a home. Excessive consumer debt and student loan debt is a major headwind to home sales.

They’re also not willing to budge on what they want. Only 17% of first-time buyers said they’d sacrifice location and only 36% said they’d sacrifice features in their dream home, proving they’d rather get what they want instead of lowering their budget.

In terms of what they want in a dream home, more than half of first-time buyers reported wanted a home in the suburbs, with only 26% claiming they wanted a home in an urban location. Similarly, 75% said they wanted a single family home. Only 11% wanted a town home and a small 6% said they wanted a condo.

Nobody wants to live in a condo, which is why condo values are notoriously volatile, and why they can make good investments (See: How to earn huge profits on distressed residential properties)

Though they’re not willing to budge on what they want, they’re still concerned about their budget.

If they want what they want, but they can’t afford it, then they will wait. It’s the choice by default.

Cost was the biggest factor in considering a home, 82% of respondents saying they considered it. The three other biggest factors were neighborhood (71%), floor plan (60%), and square footage (47%).

Buying a home is also an emotional experience for these first-time buyers, with 76% saying they’re motivated by emotional factors.

And 24% of buyers are deluding themselves. Most homebuyers make irrational purchase decisions, and it’s always an emotional one.

When asked about their reasons to purchase a home, 52% said they wanted a place to call their own and 43% said it’s something they’ve always wanted to do. Just 37% said it’s because their rent would be better put towards a mortgage.

The old adage (or realtor bullshit) about throwing money away on rent is nearing death. People finally realized throwing away even more money on mortgage interest isn’t an improvement.

First-time buyers also said they associated home ownership with security (60%), responsibility (58%), and happiness (57%). For specifically millennial first-time buyers, home ownership meant adulthood and success.

It turns out first-time buyers today are focused on getting what they want, though they remain conscious about their budgets, and are excited about what buying a home will mean.

People buy houses as family homes for emotional reasons, and not always rational ones. Many analytical people conduct research, analyze financial returns, and so on, but this is generally only a rationalization for what is a deeply personal and emotional decision.

A place to raise a family

Many people buy because they want to provide a safe and comfortable home to raise a family. It’s a primal urge. Although it shouldn’t make a difference, there is an emotional quality to home ownership renting fails to provide. Satisfying one’s emotional needs is an instinctive drive, compelling many people to buy houses.

Be a part of a neighborhood and community

As people grow and develop during their life cycle, they first learn to take care of themselves, then their families, then their neighborhood and community, and finally the whole world. Being part of a broader community is a basic human need, and most people see putting down roots as a natural extension of buying a house. They dream of watching the children play with the others in the neighborhood, enjoying block parties, and participating in organized events. All things being equal with the house, people will chose to locate in neighborhoods with others of their same demographic with whom they can make friends and socialize.

Following parent’s advice

Many people buy homes simply because their parents did. People grow up, get married, buy a house, have children, and become part of a community because that’s what their parents did, and often this behavior is strongly encouraged by the parents who will even help with down payment money to get started. There’s nothing wrong with this. Parents generally have good advice due to their broader life experience.

Rational, financial reasons to own

There are sound financial reasons for buying houses: build equity, inflation hedge, acquire asset, and obtain a tax deduction, but the primary reasons are emotional, not financial, and therefore, the behavior of homebuyers isn’t always rational. This isn’t a bad thing, it’s just a fact. They key is to allow rational thought to serve as a guide to prevent a bad emotional decision.

[listing mls=”OC16075560″]