Where are David Lereah and Alan Greenspan when you need them?
Housing Recovery May Take More Than 10 Years
blog.youwalkaway.com
In Fort Meyers Florida, a home that sold for $500,000 in 2006 may now be worth only $205,000. The % of decline from the peak in Ft Meyers is 59%. Listen carefully to this very sobering fact, it would take appreciation of 144% for the homeowner to get back to the purchase value of $500,000.
To get to 144% appreciation at an average rate of 6-7% it would take over 20 years to recover the equity. OVER 20 YEARS!
In Akron OH, a home that sold for $250,000 in 2006 may now be worth only $130,000. The % of decline from the peak in Akron is 48%. it would take appreciation of over 92% for the homeowner to get back to the purchase value of $250,000.
To get to 92% appreciation at an average rate of 6-7% it would take over 13 years to recover the equity. OVER 13 YEARS!
In Riverside California a home that sold for $500,000 in 2006 may now be worth only $300,000. The % of decline from the peak in Riverside is 40%. it would take appreciation of around 66% for the homeowner to get back to the purchase value of $500,000.
To get to 66% appreciation at a historical average rate of 6-7% it would take around 10 years to recover the equity. ALMOST TEN YEARS!
This is a very scary fact that I haven’t heard much talk about. The simple fact that appreciation has to almost be double in some cases than the depreciation is VERY chilling. Recovery as defined in the dictionary is: “a regaining of something lost or stolen”. Equity has been lost. To recover that lost equity it may take more than 10 years in many hard hit areas of America. A decade is a long time to be underwater. Throughout the last decade, people got used to refinancing every few years. They would pull out equity and pay off credit cards or use the cash to do home improvements. Equity is gone and so are the days of 20-30% annual appreciation. It’s like shoots and ladders. Going down is quick and sudden. Climbing back up, takes time and effort. Money is easy spent yet hard to save.
Jim Haughey, RCD Chief Economist said on May 15, 2009
The surplus of homes for sale is now over 2.0 million, mostly existing homes, and will still be over 1.0 million by the end of 2010 even if housing start increases are slim and household formation returns to non-recessionary trends. The surplus a year and half ahead will be partly due to the excess building in 2003-07, partly due to the still depressed, although recovering economy, and partly due to lower housing demand from reduced net immigration, real estate speculation and willingness to buy second homes.
Combined with the new wave of foreclosures that are being initiated, I predict housing will not be stable or see decent appreciation for several years. See inventory chart below as published by the Wall Street Journal on May 21, 2009.
Investors and speculators buying properties does NOT deplete the supply as reported by the Wall Street Journal on May 21, 2009
Though not every cash sale involves an investor, the investors often use cash because they can close quicker and get a better return. In the Phoenix area, for example, about 38% of April sales of single-family homes were all-cash deals. In Punta Gorda, Fla., the figure was 67%, and in the Las Vegas area, total cash sales were 39%.
Barclays Capital estimates that banks and loan investors owned 765,500 foreclosed homes as of April 1, up from 629,100 a year earlier. The inventory is expected peak at about 1.3 million homes in mid- to late 2010, according to Barclays.
The investors are no panacea to the nation’s housing woes. When the market improves, many of them could put their houses up for sale, reinflating supply.
“All this investor buying isn’t depleting supply, it’s only shifting it around,” says Mr. Allen of Gorilla Capital.
On Friday January 30, 2009 Robert Shiller said:
“It is quite possible that house prices fall more strongly than they did during the global economic crisis of 80 years ago. The real estate crisis could last 10 more years.”
My Thoughts
A decade is a long time to be under water.
www.YouWalkAway.com
Does it make financial sense to walk away and rent?
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Tags: foreclosure assistance, foreclosure crisis, Housing recovery, housing trouble, recovering home equity, walk away from your home, you walk away
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11 Responses to “Housing Recovery May Take More Than 10 Years”
Nick says:
May 21, 2009 at 1:34 pm
My friend had to make a life decision for his family. He was in MN and his property had dropped about 40% in value, his income was significantly decreased. He got a job offer in a nice area in FL for more money and a better life for his family. He struggled morally with the decision at first, but now every time i talk to him it was the best family as well as business decision that he could have made. To him it was a “no brainer” and with the struggling economy in MN he may of had to foreclose anyway, even if he had not made the move. He is much happier to have this burden off of his shoulders and not have to worry about it for the next 10 years. He will get through this like the millions of others, but from a financial standpoint it did not make sense to continue dumping money into a severely depreciated asset, especially if it was only delaying the inevitable.
Jay says:
May 21, 2009 at 1:52 pm
While some might call you a doomsday “the sky is falling” type I would actually think if anything, you’re being overly optimistic. Your estimations are taking into account not only a steady 6%-7% price appreciation over the next 20 years (An ROI most investors and fund managers would brag about!), but you are also estimating these numbers as if the bottom of the housing market is right here right now, which I think is also quite optimistic.
I would think that while the real estate valuations are gonna fluctuate and be incredible volatile, where we’ll probably see a 10% price jump one year but a 5% loss the next. But just for arguments sake, let’s play out another feasible situation… one where real estate prices fall another 10% over the next 2 years, and then appreciate at an average rate of 4% from then on…
In this scenario, the $500,000 Ft. Meyers home is now worth $184,500, a decrease of just over 63% from the peak. From there, you need an increase of 171% just to recover all your lost equity. At a 4% steady increase in home values, you’re now looking at about 43 years to get back to even… WOW!
Assuming you started year 1 of 43 in 2011, that means you become whole again in 2054. When thought about in that regard, suddenly a few years of crappy credit seems much more manageable.
Blake says:
May 21, 2009 at 2:24 pm
I never thought about recovery in that way, even with 10 percentage appreciation the numbers are scary. Personally I just started looking into purchasing a home in the San Diego area. After reading this I still think I will continue my search as I believe the right deal is good even if the market goes down a bit further.
However, If I was in one of these upside down homes it would be difficult for me to continue making payments knowing that I won’t be able to get out of my home with out a hit to my credit with in the next ten years.
Unless I win the lottery or a rich unknown relative dies and leaves me some cash.
Blake
Dayn says:
May 21, 2009 at 2:29 pm
Once I came to the obvious yet blinding decision to foreclose it was like dropping a 100 pound bag of bricks, I could finally start looking forward and leave this ulster ridding ball of stress behind. The future as well as my life seem so bright again at last. I was in the position of having to sell things on eBay just to eat and get by after paying my mortgage. The decision finally hit home when my dog had gotten out and my neighbor tried to ring the door bell but since my power had been cut off it was to no avail. This was very embarrassing and that was when I decided to throw in the towel. Having a home is a wonderful thing but it is an investment at the same time and when I finally figured out that I was not going to even start to see a return on my investment for at least another ten years it was a no brainer. After researching I found that there are over 4.5 million people in my same situation thus it is comforting to know that I am not alone.
Jay says:
May 21, 2009 at 2:37 pm
An addendum to my prior comment I just realized…
Neither one of us was even taking inflation into account here. According to inflationdata.com, since 1914 the average annual rate of inflation has been 3.4%. Take into account that we are printing an ungodly amount of money that is being pumped into the system, which should swell this number well above average over the next 10-20 years.
So at an average inflation rate of 4% per year, even in 2054 when your $500,000 equity has been recouped, it is now worth about 172% less than what it was at the bottom of the housing market. Yikes!
Renata says:
May 21, 2009 at 2:56 pm
It seems that all there is is a lot of speculation about what will happen with the housing market in the near ( and not so near) future, but let’s face it: it’s all just speculative. Nobody thought the bubble would inflate as much as it did, and no one certainly wanted to believe that the bubble will burst as gloriously as it has, with housing values sinking faster then Leonardo DeCaprio in the Titanic.
So, if you were faced with a “situation” like one of those mentioned above, if you could have seen this coming, would you have gotten out 2 years ago? Most of us would have, I’m sure. I was blindsided 2 years ago by the 90K drop in the value of my condo, and let the condo foreclose, and I’m glad I did. I know now that if I tried to hang on to it, I would have probably been bankrupt by now.
My old place is over $180,000 upside down right now, and even at an aggressive rate of 5% increase , it would take my modest 2 br. condo well over 15? 20? years to just break even. Consider that.
Demetri says:
May 21, 2009 at 3:16 pm
I cant understand why anyone in their right mind would stay in a situation like that, paying on a home thats worth half of what you owe!
SarahJ says:
May 21, 2009 at 5:34 pm
It’s refreshing to hear the truth from SOMEBODY. I’m soo tired of all these people and websites that keep pushing people to do whatever it takes to stay in their home, to scrimp, to save, to cut back, to accept a loan modification which does not reduce principal and adjusts higher ( much like option arms ) after the first five years.
It’s such crap. The banks orchestrated this fiasco with their unending greed, let them deal with the fallout.
Personally, home is down over 50% right now, my income is reduced thanks to the resulting ailing economy, and since I don’t have an ocean view, staying would just be idiotic.
I’m amazed how much positive spin there is in the mainstream media about the housing situation though. They keep suggesting that things have “stabilized”. What a load. Time will show all liars for what they are…
Brad says:
May 21, 2009 at 6:12 pm
I am a mortgage loan officer. Over the last 24 months, I have seen a massive restructuring of the mortgage loan guidelines that determines if an individual or couple can qualify for a new home purchase. In retrospect, had these guidelines been in practice over the last 8 years many of the homeowners that are in trouble today would not have qualified for a home in the first place. While this would have eliminated the housing bubble that has since burst, we must also recognize that it is this same housing bubble that fueled our nation’s economic growth. In other words, take away the housing bubble and you remove millions of jobs that were generated through it. Likewise, take away the housing bubble and you remove billions of dollars of consumer spending that came as a result of equity refinances promoted by massive home value appreciation.
So where does that leave us? Well, hindsight being 20/20 we have a chance to get back to old fashion lending principles where a home owner actually has to have a job to qualify for a loan. Due to the tremendous excess supple of homes that will become available over the next 3 to 4 years, we can not expect substantial home appreciation. Therefore, consumers wishing to make purchases will have to actually earn the required income to do so and not be dependant on their bank of equity (home) to pay for their toys. Sure, luxuries like jet skies, power boats and motorcycles will take a hit, but on the flip side, the concept of delayed gratification or building a savings account my actually become the fashion.
While it is hard to imagine where the future leads, it is possible to believe that, just maybe, we can come through this in the future, as a more fiscally responsible society that actually plans for the future and saves for luxuries.
DH says:
May 21, 2009 at 11:45 pm
It’s just so sad reading these comments. There are so many losers dumping their properties, causing so much stress on all other people who spent within their means. “It’s just a financial decision.” No, it is not. Not when you and your attitudes are screwing the country. Not when your irresponsibility has played a role in the recession that will necessitate higher taxes on more responsible citizens. Not when you are depressing your neighbour’s property value (who spent wisely and is not foreclosing). But I guess that self-centered perspective is what got us into this situation in the first place.
admin says:
May 22, 2009 at 1:19 am
Darkhound,
Everyone is entitled to their opinion. You can be mad at people for eating at McDonalds because it makes people unhealthy and ultimately raises our heath insurance rates, or you can realize that it’s a much bigger problem than that. The neighbors either A. made a bad decision in buying a property at the peak of the market or B. They purchased their property before the peak and they enjoyed the appreciation like everyone else. It has nothing to do with someone deciding to walk away from a bad investment. That is not the cause of property declines. Values are going down because real estate was WAY overpriced and the supply and demand is out of whack. These attitudes aren’t “screwing” the country. The country was screwed by the greedy people who allowed this to happen to our country, while they made Billions of dollars. |
