Your Home Value Could Drop By Another 15%
It all started with a housing bubble. Before there were stimulus packages, before there was a credit crunch, before there was a recession, and before there was the worst bear market since the Great Depression, a general decline in home values was the first sign of trouble in the economy. Home values for the first half of this decade appreciated at high, unsustainable rates, and lenders gladly loaned money to borrowers who should have had no business getting a loan. With all the problems out there now, it’s hard to believe what a difference a year makes!
For the average American, their home is their most valuable asset and their biggest liability. Certain parts of the country have seen home prices falling more dramatically than others, but across the country, homeowners have watched their equity disappear month by month. Over the past year, the average home price in the US has declined by 19.1%. From the 2006 high point of home prices, average prices are lower by more than 26%.
There is a futures market for home prices, and this market suggests that investors believe that home prices will drop by another 14.5% over the course of the next 12-18 months before bottoming out and beginning to recover. This would represent a 40% drop in the average home value over the course of between three and four years. Areas that are hardest hit, such as Phoenix and Las Vegas, could see prices fall by an ever greater amount from peak to trough.
One of the issues expected to be a challenge for the housing market is the pessimism surrounding this most recent stimulus plan. Although the Obama administration has gone to great lengths to assure Americans that they will find a way to help troubled homeowners, there’s not a lot of faith in the plan as it has been laid out so far.
One concern is that the plan is designed to help borrowers who are behind on their payments, causing people who have been responsible by buying within their means and making their payments on time to wonder why their tax dollars should rescue others from their irresponsibility. Another concern is that the tax credit for new homebuyers, which ended up being an $8000 incentive in the final version of the bill, is spread over a number of years and will not have the impact necessary to motivate buyers that are currently on the fence.
There is no crystal ball that can tell us when things in the housing market will begin to improve, but it’s hard to imagine a turnaround in the short term with the amount of pessimism and lack of consumer confidence that is evident today. Prices will bottom out at some point, but it’s likely that prices decline further before we begin to see improvement.
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Tags: credit crunch, housing market, recession, stimulus plan
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