Perhaps the most prevelant question I encounter is, "How much more will my home value decline?" Of course, no one really knows for sure, but we could use past history as a guide. For the most part, home prices track income. Since WWII, there has been a direct correlation between what economists call effective purchasing power and home prices.
According to a recent article in USAToday.com, home values increased 0.5 percent from 1950 through 2000 after adjusting for inflation. During the period of 2002 to 2006, the USA experienced a freakish 8.2 percent with a peak of 12.3 percent increase in 2005 much of which was completely distorted by easy credit, adjustable rate, zero interest, and sub-prime mortgages. During the peak years in Harford County, I measured appreciation rates of anywhere between 15 percent to over 20 percent per year. It was clearly unsustainable. We knew it would not last. Many of us who had been in the real estate business for any length of time would always wonder when, not if, it would stop.
The "canary in the coal mine" for me was a house in Stoneridge. It was a corporate relocation appraisal I did in September 2005. It was a nice house with no major issues. Given the community's recent sales history, it should have sold for full price within 30 to 60 days. It actually took over five months to sell and for considerably less than my appraised value. In early 2006 after I saw the closing price, I knew the party was over.
So getting back to the question at hand, "How low will we go?" The experts in the aforementioned USATODAY.com article estimate values will drop ANOTHER 17 percent if we assume the traditional price to income relationship. I know it's hard to wrap your mind around that, but I think it is probably pretty close. Prices have to come into alignment with what people can actually afford using traditional mortgage underwriting guidelines.
I did a little experiment with my own house as a test. I assumed my house should have increase approximately five percent (includes inflation) per year since 2001. That number was exactly 17 percent less than its current value. There may be something to this theory.
So what does this mean to you. Well, if you are a lender, you need to be extremely careful because there is a good chance some of your collateral could evaporate during the next couple of years. If you are a borrower, you could be upside down real fast if you have a high LTV. If you are a real estate agent, you need to educate your buyers and sellers and protect them from making a big mistake. You've been warned.
All comments and rejoinders are welcomed and encouraged for this or any other posting.
The actual article cited in this blog can be found at:
http://www.usatoday.com/money/economy/housing/2008-12-12-homeprices_N.htm