Three reasons U.S. homeowners shouldn’t lose hope

October 6, 2010

American homeowners already depressed by the shrunken value of their biggest asset should skip the International Monetary Fund’s latest missive on the risk of a double dip in property prices. The fund’s grim outlook is hard to dispute. But three historic measures now suggest that homeowners can put down the revolver.

Buying property has been an emotional rollercoaster over recent years, carrying owners from the heights of smugness for their quick profits to the depths of despondency. Residential home prices fell close to a third between 2006 and 2009 leaving a trail of shell-shocked proprietors. And the IMF says the pain may not be over yet.

The IMF’s economists certainly raise valid concerns. With tax credits expiring this spring the housing market now has to support itself without crutches. Indeed, the helping hand from taxpayers may have simply brought forward house purchases — meaning even slacker activity over the coming year.

Worse still, one in seven mortgage holders is now at least 30 days late on payment or already in foreclosure. Since foreclosed houses sell at an average discount of 35 percent this may continue to drag down the entire market. Meanwhile, almost two-thirds of those given a second chance by lenders had already lapsed again by March this year.

Still, despondent owners can take solace from three historical comparisons. To start with, relative to disposable income, houses are as cheap as they have been since records began 35 years ago. To get back to a fair value on this measure, according to the consultancy Capital Economics, prices would have to rise 11 percent. Second, adjusted for inflation house prices are now equal to their level in 2001, before the height of the property frenzy.

Finally, the second legs of house price declines tend to be far less painful than the first. The first wave of the Great Depression, for example, wiped 30 percent off property values before prices rebounded 20 percent. The second downturn after 1937 erased less than half of this upswing. Other housing market double dips in the United Kingdom and Sweden in the 1990s showed a similar pattern.

Of course, the American housing market has recently shown a disconcerting ability to flout historical precedent. But notwithstanding the IMF’s worries, there are now good reasons to believe that property prices are very close to hitting rock bottom.

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This is not good news for homeowners – ridiculous! Why would owners take solace in the fact that their house is now cheap, relative to disposable income and adjusted to 2001 pricing levels? (rhetorical, please). That is a loss of value AND counties continue to tax at a rate that does not reflect the reduced price of the property or structure – they increased taxes while the market value dropped (yes, to offset the loss of revenue from distressed/foreclosed property taxes).

A second wave of house price declines that is less painful – are you kidding me? Wow – that will make everyone feel fantastic, and I’m sure the folks that reneged on their lenders’ second chance mortgage option feel powerfully happy about that historical fact.

This article is written for the hawks waiting to swoop in and gather up properties and for market speculators – not for homeowners struggling to pay their mortgages, find jobs, and wonder why their property taxes have jumped while everything else of value drops.

Enough with the “feel-good-about-yourself” silliness so the market folks can have fun with manipulating dollars (and sense). Contemporary facts are relevant; historical trends no longer apply in this world.

Posted by finneganG | Report as abusive