Smart Borrower Blog

Home Values May Take 50 Years To Rebound


Dec 12th, 2008 @ 5:12 PM by Alden Smith


Many high end homes today are causes for concern in the economic struggle, because their inflated value means that the owners have ended up with an underwater mortgage, and find themselves in the unique position of owing much more than the home is worth.  For many years, homes in areas of certain parts of the country, such as SoCal, have been sold for an enormous price as compared to a like home in places like Ohio or Illinois.  Some of the tiny cracker box homes I have seen on Dr. Housing Bubble have stunned me due to the price they are asking for them.   It may all be about location, location, location, but when you have a market such as we currently have, it doesn’t matter where the home is located.

Home prices hit a historic peak in the spring of 2006.  Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn., said “We will never see these prices again in our lifetime, when you adjust for inflation.  These were lifetime peaks.”  What we have ended up with is people who owe much more on their homes than they are worth, and some of these people are just plain walking away.

One of the reasons that people are in this position is because of highly leveraged loans with little or no down payment.  During the boom years, lenders got fancy, and built some pretty innovative mortgages.  People were getting into homes for very little money.  This was okay when things were going well, but now that the bottom has fallen out, these same people are in a world of hurt.  Market values have been stable for nearly a half century following the end of World War II, but really took off from 2002-2006, when the financing got creative.

On average, home values have dropped 17% nationwide.  This plunge has wiped out trillions of dollars in home equity.  Susan Wachter, professor of real estate at the University of Pennsylvania, is concerned that this loss will drive many families and banks into insolvency.  Wachter said “Homes are different than other goods and services.  The fragility of our banking system is tied to the value of homes.”  The fear is that if housing values do not stabilize that the financial woes will move to other areas – credit cards, car loans and commercial mortgages.  There is already evidence of this happening.

The source of my information, USA Today, thinks that it could take 50 years for this to change.  In the meantime, all people can do is ride it out and hope for the best.  The amount of cash the Fed is throwing at this issue will not really stem the tide.  We can only wait to see what will happen when a new administration takes office.  I personally do not see much help coming from this quarter, at least not for quite some time.  We are in too deep.

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