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Declining Property Values is not all bad!

January 14th, 2008 2:54 PM

Property values have declined in many parts of the country and many homeowners are suffering due to this decline. Fortunately in Texas there are factors keeping us from the worst of the drop in values even though almost all markets have been affected somewhat. But looking at it from a longer perspective it could be worse. Take Portland, Oregon and Seattle. Since 2000 property values in these two cities have almost doubled, appreciating around 8% or 9% a year. They have declined less than 1% from the peak as of Sept 07. So have the brakes been applied to the rapid appreciation in these areas. Yes. Have prices dramatically declined. No.

But there are areas that have seen much more dramatic decreases in value. The cities that have seen around 10% decreases in value from the peak in values are Miami, Washington D.C., San Diego, Tampa, Las Vegas, Phoenix, and Detroit. All of these cities, except Detroit, have seen incredible increases in value since 2000. Miami has seen the most appreciation with almost 180% peak gain since 2000. So following these statistics a Miami condo that sold for $200,000 in 2000 sold for $560,000 at the peak. And with the 12% drop in values from the peak was only worth about $500,000 at the end of last year.

If you are a homeowner in California, Nevada, Arizona or Florida, wanting to use your home equity like an ATM, you're hurting big time. If you are a buyer that wants to purchase a new home and have to sell a home you recently purchased that is certainly a challenge also. But if you don't have a home to sell and are considering purchasing a home it has turned into a buyer's market and is a great time to buy.

But not everyone purchased a home last year or took out all of their equity. Our fictional Miami condo owner that purchased their condo in 2000 may not need to sell today and if they do, they can still pocket some decent change. True they may be feeling a little poorer by $60,000 in equity, but they can console themselves with $300,000 in appreciation over the past few years.

So far what I believe we are seeing is a much needed correction in property values. It had to happen. Think of it this way. If Miami values continued to double every five years, a home valued at $500,000 today would cost $8,000,000 in just 20 years. I don't think we would be making many loans 20 years from now if the houses cost $8,000,000.

So what led to this run-up in values? Loose credit and speculation. A market "crash" (at this point really a correction) tends to take care of the speculators. You don't see people lined up to snap up pre-sales in Miami just to sell the contract as soon as the project is completed like you did just a few years ago. And now a purchaser may have to show some income and have decent credit to borrow a few hundred thousand dollars to buy a home. These aren't necessarily bad things. Unless you're a mortgage or real estate professional in Miami or one of the areas hardest hit with this market correction. Or you are a home owner that purchased at the top of the market and needs to sell. Or a homeowner living beyond your means and needing your home equity to use as an ATM. There is no denying though that, on a personal level, this market correction is devastating to many. It reminds me of that definition of the difference between a depression and a recession. 'If my neighbor loses their job, it's a recession; if I lose my job, it's a depression." But with adversity comes opportunity.

So might we see a recession? Possibly. We are already seeing a slowdown in the economy and it might get worse before it gets better. But unemployment is still low even if the quality of jobs has declined. If people have jobs that can pay for housing then they will still buy houses. People need a place to live. Will real estate growth patterns return to a more sustainable pattern driven by people's need for shelter instead of speculation and loose credit. I hope so.

The $64,000 question is will the property value decline reach a tipping point where the price correction turns in to a real crash where property value declines reach levels that start to snowball. Fortunately this is probably remote. While housing is a huge part of the economy and consumer spending may contract some due to the decline in home values, the economy is probably resilient enough to absorb this correction. So while we are seeing a slowdown, it remains to be seen if it is an actual recession. The chances of a depression though are remote.

Regarding the debt market, it is functioning as it should. It has been dysfunctional for the last few years and is now returning to normalcy. There are plenty of buyers for good paper, but not so for junk. Just look at the rates for conforming . . . low and going lower. If there were no purchasers for this paper the rates would be skyrocketing to attract investors. Not so for loans to people with bad credit and no income. You can't sell this paper at any price. Without the unsustainable increases in property values this paper is worthless, and that fact is reflected in the lack of investors.

Unsustainable increases in property values and loose credit over the past few years have distorted the perception of what is normal. When addicted to the "drug" of easy money, it is literally sobering when things begin to return to normal. But that withdrawal, while difficult, is ultimately healthy for the economy and our children's future. Would you really want your children or grandchildren to have to pay $8,000,000 for a Miami condo, even if they could go stated?

Posted by Harlan M. Cooper on January 14th, 2008 2:54 PMPost a Comment (0)

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