Housing Price Recoveries Expected to be Years Away

In light of new data issued this week that shows the recovery in home prices is still a long time away, I have re posted an October 2010, blog.  Frankly, unless you are expanding a family, relocating, or downsizing, trying to sell in at these price levels doesn't make a lot of sense.  The chart below shows the expected recovery times in America by state. It's not pretty:

What we see is that the states with the highest run up in prices during the 2005-2007 period had the farthest to fall, and the longest to recover.  Further those hot markets built the most homes in that time period as well, so there is a lot more inventory sitting as well in these states.

Further this price correction eclipses the housing price declines experienced in the Great Depression as well.  From 1928-1933 the decline was 25.9%. As of today this most recent decline is 32%. The percentages are based on the Case-Schiller 20-City Price Index.

I think the best we can do at this time is what i said last October. Rates are low, refi into the best rate you can get at this time, shorten the life of your loan, and ride out the bottom that we are in.

D

from: Monday, October 18, 2010

A House That is Worth Less Is Still A Wonderful Place to Live

I just refinanced my home. Guess what? It's worth less than I paid for it. So, I immediately have all the same thoughts that you do about your house and its value. First, OMG! What do I do? Sell, upgrade, remodel, ask for another appraisal? Then I think the obvious. I have a wonderful home in a nice neighborhood, and I enjoy the roof over my head. I can paint it the color I want. I decide when the grass is cut and how to shape my River Birch trees in the front yard. It's mine.

What is most striking in my thought process is the one thought that didn't cross my mind, and that's walk away.  I have a contract with Freddie Mac (the Government). It says I make my payments and they let me own a home, and they let me stay there without interference.  If I sell my home and make money on the sale Freddie doesn't get a cut of my profit. It's mine. Likewise, if I lose I can't send them the loss or blame them for my choice of buying in the first place. That's mine too. They held up their end of the deal and I hold up mine. 

It seems that this contract of mortgage, created in the dawn of finance, is up for re-negotiation. And, as the national home price chart below indicates Missouri and the mid-West isn't that bad, and we could be a lot worse off. This is a year-end 2009 chart, but I think the worst damage to home prices is behind us, and while we may slide a bit more, I don't feel it will be significant.

So, if we decide to break contracts solely when it favors our interests, what would happen if others did the same. Like when you almost have that home paid for and out of nowhere Freddie comes knocking; "hey this is worth a lot more than you paid, cut us in for half, or we are taking your home...". Or, you're in the ER with a little one needing stitches, and the hospital decides to break their contract with your insurance provider just because it benefits them? The beginning of a moral unraveling of contracts in our modern society would see no ending. 

No one, including me, likes to see their home value go down. However, a contract is a basic building block for trade and the fulfillment of a contract is the foundation for business as we know it. There is one other possibility to consider when thinking of all the options. With interest rates historically low, consider refinancing your home with a bank with low closing costs. Take the opportunity to shave years off the life of your loan. Quite possibly, the decline of your homes value due to this crisis may be offset by a much, much lower interest rate and it may be more of a positive than you think.  An opportunity of a lifetime to pay off your home quicker, due to the same crisis. In the mean time, your home is your castle, and no crisis can change that.

D

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