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Looking to Recoup Your Home’s Lost Value? It’s not Happening—Ever!

By
Services for Real Estate Pros with TheHousingGuru.com

I’m still surprised by the number of people who believe that home values will magically return to those of 5 years ago; and if you are one of those looking to recoup your home’s lost value, it’s not happening—ever.  How can I be so certain?  It’s pretty easy once you look at the facts.

 

Home values have historically appreciated at a rate near the rate of inflation—once you adjust for the differences in size and discount for geographic anomalies.  However, that trend changed when we began the recovery from the “tech-bubble” of the last decade.  As the Fed encouraged easy credit (an understatement) and the mortgage industry discovered they could package and market sub-prime loans at premium prices, we saw a housing boom unlike any we’ve ever experienced.  Driven by increased demand, home prices skyrocketed, rising 10% or more per year in some of the hottest areas. 

 

And now that prices have fallen by 30% or more (60% in the worst areas), owners want to know when they’ll recoup the value lost during the crash.  Many, nearing retirement, had viewed their accumulated equity as a cushion to supplement their retirement income; others saw it as a fast track to “easy street,” and have already spent their “windfall.”  However, all want to know when values are coming back, but unfortunately they are not—not next year or the year after—not ever. 

 

To understand why I would say “not ever,” we must look at what drives home prices up.  It’s not that homes somehow become more valuable over time or that ownership rates historically trend upwards.  Disregarding the growth in the average home’s size over the past few decades and ignoring the geographic appeal of a few specific areas, home prices have increased because of inflation.  As the dollar became worth less—some would say worthless—it was necessary for home prices, along with the prices of other goods and services to follow.  When we look at the trend-line for home prices over the past fifty years, it has closely followed the rate of inflation. 

 

What that means is that home prices WILL increase in the future, but the majority of that increase will be consumed by the corresponding increase in the rate of inflation.  If we sell that home, those dollars received will have less value than those of today—given the likelihood that the U.S. will continue to experience some degree of inflation. 

 

The home prices experienced during the housing bubble were artificially high—the GRAPH below from Calculated Risk demonstrates just how far out of line they were—and their fall was to be expected.  The bubble prices were not based in an inherent increase in a home’s value, but were artificially driven by forces not directly related to housing; and, barring a direct attempt by the government to create another bubble, they cannot return. 

 

What we’re left with is the natural progression of housing following inflation.  Home prices will not equal those of the bubble for many years unless we experience—as some have predicted—a significant increase in the rate of inflation.  But once again, such an increase will serve only to compensate for a loss in the value of the dollar; it cannot return the losses suffered following the crash, for those dollars have been lost forever.      

 

A “recovery” in housing won’t feel like recovery at all.  The best we can hope for is stabilization and a return to the natural trend of home prices following the rate of inflation.  To anticipate a sudden and dramatic upwards movement is only wishful thinking, and it is wishing for a return to the very conditions that caused the collapse.  

graph of home prices

 

 

 

 

 

 

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Comments (104)

William James Walton Sr.
WEICHERT, REALTORS® - Briotti Group - Waterbury, CT
Greater Waterbury Real Estate

John, this was a very good explanation of how the housing market works, and a very sobering analysis of where home prices are headed. I hope that every seller will take this to heart.

Dec 14, 2010 03:09 PM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

I am not sure that this will continue in perpetuity... I think over time, these cycles repeat themselves.

Dec 14, 2010 03:13 PM
Kate McQueen
Realty Associates Texas - Cypress, TX
Tailored service for your real estate needs!

Artificial inflation caused by irresponsible government involvement in the housing market caused "the bubble," as well as other factors, most of which involve national policy and lack of oversight on Wall Street.  But IT IS NOT true that real estate markets across the country were consumed by it.  While it's true that markets across the country were affected by it, some markets were less affected than others. 

Real estate has become hyper-local, community by community and property by property.  Broad sweeps and generalizations are just that.  It's more important than ever for real estate professionals to study their market with the intent to serve their clients while the economy is adjusting to natural changes that are occuring in a global economy AND local economies.

While the country has unemployment numbers that are stated as AN AVERAGE, certain states and cities HAVE BETTER THAN AVERAGE NUMBERS... Such as Texas.  We are faring a bit better, though our housing prices dipped heavily.   But we are holding ground.  Adjustments have been made.  Conservative policies in Texas have kept us on safe ground for a full recovery given that economic policies coming from Washington shift to a more supportive platform.

Let us pray...

Dec 14, 2010 03:16 PM
Don Wixom
RE/MAX Executives Nampa, ID - Nampa, ID
"Looking out for your next move..."tm

John, this is a very interesting perspective. It makes sense when accounting for inflation rates and the HUGE bubble we experienced. Stabilization, here we come!

Dec 14, 2010 03:25 PM
Lise Howe
Keller Williams Capital Properties - Washington, DC
Assoc. Broker in DC, MD, VA and attorney in DC

JOHN, I try to tell clients the same thing in Kenwood Forest, and sometimes they listen and sometimes they don't!  Fortunately Kenwood Forest is a neighborhood on the border of Chevy Chase and Bethesda that has held its value more than most.

Dec 14, 2010 03:34 PM
Kate McQueen
Realty Associates Texas - Cypress, TX
Tailored service for your real estate needs!

Are you a remodeler in Georgia?  Just wondering about the "Guru" thing.

Dec 14, 2010 03:52 PM
Allison Stewart
St.Cloud Homes - Saint Cloud, FL
St. Cloud Fl Realtor, Osceola County Real Estate 407-616-9904

John- I have been saying the same thing for over a year now.  In Central Florida what drove housing prices to artifiscial highs were the lack of available homes. Once the building boom hit there were more homes than theur people to buy them.  The conditions of the housing market in 2005 were prime for inflation of prices.  For the economic reasons you cited I agree. Deflated dollars do not equal equity recaptured.

Dec 14, 2010 10:17 PM
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

William - Sellers need to understand the realities of the market.

Joan - Yeah, we don't seem to learn from our mistakes.

Kate - I certainly agree on the significant differences in market conditions around the country, but the country as a whole is affected by the macro trends.

Don - Stabilization would seem like nirvana.

Lisa - You're fortunate to be in an area less affected than many.

St. Cloud - Thanks for stopping by. Hope conditions improve in FL.

Dec 15, 2010 12:22 AM
Gordon Derrington
RE/MAX ANCHOR or Marina Park - Punta Gorda, FL
SFR

Very good post.

Dec 15, 2010 03:21 AM
Petra Norris
Lakeland Real Estate Group, Inc. - Lakeland, FL
Realtor, Lakeland FL Homes for Sale

John - I don't think that we will "ever", at least not in my lifetime and I think I have quite a number of years left here on this God given earth, see such astronomical increase in home prices.  My county (Polk County, FL overall decreased home prices from the boom till now is around 55%, Lakeland FL where my home is has seen a decline at around 50%).  

I'm often ask from folks when we will see home prices return, I always say not in my lifetime. I do believe in stabilization and the return to normal home prices, however we are a long time away from that.  Great blog!

Dec 15, 2010 04:51 AM
Dave Halpern
Dave Halpern Real Estate Agent, Inc., Louisville, KY (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

Great and insightful post.

Hence the advent of strategic defaults. Many homeowners problems such as job loss and divorce are compunded by their hopelessness of ever recouping the value.

Dec 15, 2010 05:02 AM
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Gordon - Thanks!

Petra - I agree.  Thanks.

Dave - I think we'll see an increase in strategic defaults as homeowners begin to realize that their home's value is still far from recovering.

Dec 15, 2010 05:27 AM
John MacArthur
Century 21 Redwood - Washington, DC
Licensed Maryland/DC Realtor, Metro DC Homes

John - interesting position. Lost equity is lost equity. Well, maybe not lost, in some cases equity was cashed out and used for something else. The impact of inflation is nothing new. Stating that home values have only gone up because of inflation is earth shaking as stating that the earth continues to rotate.

Homeowners in the past have "traded up" in situations where their income increased (in part due to inflation) and their situation changed. The equity they realized was a combination of paying down a mortgage and selling their home for more than they owed on the outstanding mortgage. Of course, if they had been in the home for 5 years or 10 years or more and had not taken value from the home via a equity loan there was a good chance they received money at the table. The value of that money may have been devalued because of inflation, but the fact remains, they did get money.

In our current situation, home values have come back down. The rapid increase that occurred was abnormal and the adjustment that occurred was to be expected. Those that bought property at an artificially created high price (the price created by a market "gone mad") will have to wait until normal appreciation reaches the point of their outstanding mortgage.  Those that used the artificially created equity for other purposes will have to live with their decision to cash out and spend now and pay later. If they choose to repay the debt, they will pay with inflated dollars.

Long term purchases are always at the mercy of inflation. Buy today and pay with tomorrows money. The money you pay with will certainly be worth less and the value of what you pay for will certainly increase.

All of this is very general. It is based on simple facts. When my parents paid $9,000 for a home in 1952, they bought a home. They paid the mortgage each month. When the home sold in 1980 for $75,000, there was a tangible gain of $66,000. Did they lose money? They had paid off the loan in 20 years. They used dollars earned each year to make the payments. Did they lose all that money because of inflation? 

You see, these charts and graphs are all fine and good, but they do not take into account the fact that there is a cost to housing, whether you rent or you buy. If you rent, you receive no long term value for the money spent. If you buy, you at least have real property to sell at any point during ownership.

Inflation impacts all dollars. Dollars earned, dollars spent, dollars invested are all impacted.

The premise is fine for educational purposes, but it completely ignores the bigger problem. Yes there is lost equity on paper. Yes, if prices dropped 30%, it will take about 9 years to recoup the loss. If the equity was cashed out, there is a real loss until inflationary pressures push the value above the amount owed. We bought our home 11 years ago. Never took any cash out of the home via equity lines or loans. Sure the value went up and came back down. The home cost roughly $225,000 when purchased. At one point, before the crash, it was valued at over $600,000. Today, it is back to around $450,000.

We never had the $150,000 "lost". We continue to pay. We continue to have shelter. We are like a lot of people out there. We don't have to move. 

But thank you for sharing one aspect of the housing marke

Dec 15, 2010 05:49 AM
Adrienne M. Smith
Elite Realty Services - Oakley, CA
I Turn Challenges into Opportunities

Never, is a long time!  Thanks for keeping it real!  It always amazes me how uneducated most people are regarding basic economics.  There were so many folks out there with rose colored glasses when the good times rolled and they still have the glasses on today! 

Dec 15, 2010 06:13 AM
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

John - Stating that home values have only gone up because of inflation is earth shaking as stating that the earth continues to rotate.  If you read all the comments as well as comments on other posts you'll discover that many are unaware of the earth's rotation.

And while I understand all that you added, many, especially homeowners, do not.  My post is intended to help them deal with the realities of their current situation. 

Adrienne - And like 3-D, the glasses don't change the facts.

Dec 15, 2010 06:33 AM
John MacArthur
Century 21 Redwood - Washington, DC
Licensed Maryland/DC Realtor, Metro DC Homes

John - I must have overlooked mentioning that the post does explain reality in a thorough fashion. I am sure that those that appear to be ignorant of the earth's rotation should read and re-read the post. This is basic information that every real estate agent should grasp.

I am glad you took the time to present the information. When you have time, you might put together something regarding the interest of the client must come first.

Dec 15, 2010 09:10 AM
Mary Yonkers
Alan Kells School of Real Estate/Howard Hanna Real Estate - Erie, PA
Erie/PA Real Estate Instructor

John--Very well written & documented.  Congratulations on the gold star.  You deserve it!!!!!!

Mary

Dec 20, 2010 01:59 AM
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Mary - Thanks for the compliment and support!

Dec 20, 2010 02:26 AM
Anonymous
Laura Perry

Thanks for getting me to realistically consider that I'll never reagain any of my losses on the condo I purchased for an adult disabled child to live.  Thanks also for acknowledging that some buyers did indeed suffer real losses.  In my case I bought the 1 bedroom condo in the end of 2005 for 158K which I thougt was insane.  The realtor said that's what properties were doing.  I had never heard of the term bubble. Now five years later we see it's not the best for him and the better scenario would be for me to buy a larger home or one with an addition for him to live in with me as he is now. I was naive to thnk his SSI check could cover enough of the expenses in the first place. The condo has lost about 75K.  I have a very tangible and real loss because I paid CASH for it. I can't short sell it or I would.  That cash is lost that could have been used to build him the addition or increase living space in a new house.  I've since learned it's risky to pay cash for a home since you carry 100% of the risk for the home, otherwise the bank shares risk with you when you have a mortgage.  I would like to retire and move in 5 years-he comes along. Do you think I should sell the condo now and  swallow the loss and move on with our lives, or hold for 5 more years.  In the meantime my ex husband is living there (though only the owner-me) is supposed to be there and he's giving me $200 a month to help out. Most of your bloggers are hard on buyers during that time assuming we were looking to get rich, or buying more than we needed. Really, we were just naive and victims of the crisis due to our timing. 

Aug 18, 2011 08:10 AM
#104
John Mulkey
TheHousingGuru.com - Waleska, GA
Housing Guru

Laura - If you read my posts, you'll see that I'm very sympathetic to the plight of most homebuyers--it's the banks, Wall St. and Congress that I hold accountable.  I do receive lots of comments from those who only take a superficial view and blame home buyers for irresponsible behavior; but I think buyers were mislead by both politicians and lenders.

Regarding your decision, I can't know what the market will do in your area--you don't mention where you live--some areas will see improvement, while others will probably experience further declines.  I'd speak with several real estate agents to try to get a consensus opinion on what the future holds for your area.  In the end, I suspect you'll still sell at a significant loss, but that loss could be lessened if there's a chance for improvement.  I'd love to hear how things work out for you; you can keep me posted or ask additional questions at: john@thehousingguru.com.  Good luck!

Aug 18, 2011 08:34 AM