I wrote this article in August of 2007 although it seems as I was being naive about the real trouble we were going to be in, the numbers seem to be working out. Enjoy
The media has reported gloom and doom for the real estate market for some time now. I wanted to take the time and clear some things up about the market as a whole.
Real estate is a localized business in nature. What happens in one part of the country doesn’t necessarily affect another. This is true in any market including the one we are in today. There are parts of the country that are enjoying property appreciation and brisk sales. While most of the country is in a market where there are plenty of homes but no buyers, however we must keep this situation in perspective. (You’ll see what I mean at the end of the article.)
What we are seeing today is good old fashion panic and hysteria induced in part by the media, bad investments, bad loans and a market that was bound to adjust. You see, those buyers that were snapping up properties a few months ago were most likely the same ones that couldn’t get a mortgage pre-2001.
Some lenders loosened their criteria and to stay competitive, others followed suit. All of a sudden just about anyone could get a mortgage. Some of these individuals did quite well and went on their way. Others got caught in that ARM* re-adjusting nightmare.
Speaking of ARM re-adjustments, let’s discuss that for a minute. What would happen if thousands if not millions of loans are re-adjusting ARM’s, set to re-adjust anywhere from 2005 through 2008 or perhaps later? I’ll tell you what would happen, those people (Attracted by low introductory rates and by people with less than stellar credit ratings.) would run to their banker/broker and try to refinance.
To make matters worse this is all happening as the market is cooling, causing home prices to drop as well as appraisals. Now those same homes are worth less than they are mortgaged for and these poor souls are stuck with an overvalued home with a high mortgage and no way to refinance. What’s the next logical step to salvage an already bad situation? You guessed it, “Honey we’ll just sell the house, we’ll be all right.” And there doing it by the droves.
Thousands of folks are stuck in this same scenario. Now others who want to sell their home maybe because they want a bigger home or have outgrown their current home are stuck in a market with too much inventory and not enough qualified buyers. Thousands of homes languish on the market because they are priced too high to sell, while others slip into foreclosure. Owners simply can’t afford to lower the price, so they just walk away. Simple economics: supply and demand, prices drop as inventory rises and vice versa. Not gloom and doom.
When will it all go back to ‘normal’ you ask? In a sense this is normal, maybe even a little on the flat side sales wise. Considering we just came out of a record setting market that saw property values appreciate at 20% and above annually. This is unheard of and we will probably never see it in our lifetimes again.
Now for the brighter side of things: If you were to buy an average property: house, second home, condominium or small multi-dwelling for $200,000, and that property were to increase in value at a modest 6% per year (7%-8% is more accurate historical average), the chart below illustrates the appreciation of that one property.
Ten - Year Projections
6% Annual Appreciation - $200,000 Property
|
After Year:
|
Appreciated Value:
|
|
1
|
$212,000
|
|
2
|
$224,720
|
|
3
|
$238,203
|
|
4
|
$252,495
|
|
5
|
$267,645
|
|
6
|
$283,703
|
|
7
|
$300,726
|
|
8
|
$318,769
|
|
9
|
$337,895
|
|
10
|
$358,169
|
The value of the average $200,000 property appreciating at 6% for ten years is about $350,000. Now let’s take a look at what would have happened to that same property if the boom market would have continued using the 20% appreciation rate we spoke about earlier.
Ten - Year Projections
20% Annual Appreciation - $200,000 Property
|
After Year:
|
Appreciated Value:
|
|
1
|
$240,000
|
|
2
|
$288,000
|
|
3
|
$345,600
|
|
4
|
$414,720
|
|
5
|
$497,664
|
|
6
|
$597,196
|
|
7
|
$716,636
|
|
8
|
$859,963
|
|
9
|
$1,031,956
|
|
10
|
$1,238,347
|
Some of us are in the 4 to 5 year range in the above chart as it relates to the property value of our homes. If you compare that to the previous chart, a home purchased in 2001 for $200,000 should be worth about $268,000 today that property is probably in the neighborhood of $414,000 to $497,000. So we’re about $200,000 ahead of the ballgame. No reason to panic, unless of course you ‘cashed out’ all of the equity, then you’ll just have to live there a little longer provided you can afford the payments.
I wouldn’t pay much attention to the media. They get paid to keep you buying newspapers and watching commercials while you wait for that ‘Real Estate Exclusive.’
Keep your head up and your ear to the ground you never know, you might run into a great real estate bargain.
Regards,
Noel Padilla
*An ARM, acronym for "adjustable rate mortgage", is a mortgage on which the interest rate is not fixed for the entire life of the loan. The rate is fixed for a period at the beginning, called the "initial rate period", but after that it may change based on movements in an interest rate index.
