Many people have a tendency to count home equity as a part of their net worth, even though it's only on paper. I disagree with Walt34 in his assertion that the only two times home value matters is when a person buys or sells a house. Try telling this to subprime borrowers who are now attempting to refinance their home, but the lender is turning down their loan application because there is negative equity in the home. Likewise, people who may be interested in refinancing their home may be in for a surprise when they find out the bank can no longer loan them money because there is simply no equity left in their home. An elderly person may be desperate and wish to obtain a reverse mortgage, only to be turned down for a new loan for the same reasons. I agree, however, that if someone is planning on staying in their home for ever and ever, then valuation may not be important.
During the past few years, there has been a tremendous amount of bragging that has gone on because of high home prices. I think that this has probably gone on to the extent that it has become an ego boost for some people. Someone might say for example, "My home is worth three times what I paid for it seven years ago." In most areas of the U.S., the bragging is slowing down. As the article states, there have been one million foreclosures since the housing bubble burst with probably two million more on the way through 2009. Folks, that's a lot of homes. Are some of these foreclosures happening in your neighborhood? If so what effect do you think this will have on comparables that will be used to support future appraisals?
Let's pretend that that "HousingPredictor" is wrong in their claim that housing prices will not bottom out until 2111. For arguments sake, let's define the bottom of the market as when most people can place their home on the market and expect to sell it in three months or less. Let's say that occurs in 2009 instead of two years later as predicted in this forecast. In the meantime, prices may have dropped 20 to 30 percent from their high, while most experts say that home prices peaked in about September 2005. Hypothetically, if someones home was worth $500,000 when the market peaked and lost 30% of its value their home would now be worth $350,000. Prices will now have to increase by more than 42% in order to once again reach that $500,000. How long do you think that will take? I believe that many people who are reading this post will not see it in their lifetimes.
Don't forget that real estate prices were artificially inflated because of subprime loans. Easy money is no longer available and probably never will be again. Also, we're now seeing record low interest rates. What happens if rates go up to more historical high levels? Not many buyers are going to be able to qualify for these large loans. In most cases, it is the lender that makes a successful escrow possible. Obviously, with no borrowed money, there will be no transaction. Money will be tight in coming years. Lenders have learned their lesson the hard way.
Yes, my crystal ball is better than no one else's. After all, even most economists (who have much more financial expertise than myself) cannot even accurately predict the start of a recession. I don't think most people are recognizing the magnitude of what has taken place with the bursting of the real estate bubble. Sure, I'm a homeowner and I wish my home was worth what it was two years ago and that prices would stop declining. By the way, I just took a walk in our neighborhood and saw many new homes with "For Sale" signs in the front yards. I also, saw a large housing development where construction
has stopped without having finished the houses, because the developer apparently has run out of money. This is now happening in neighborhoods across the United States.
I would like to be optimistic, but I think in terms of history this bubble is far worse than what people are willing to admit. "HousingPredictor" is more in touch with reality than many who view our current crisis through rose-colored glasses.
