The Good, the bad, and the ugly...

This article is an account of where we've been, and a prediction (based on my own personal research) of where we're heading. Please take it for face value, and feel free to offer up evidence that I'm wrong. I'll welcome any comments you have.

In the beginning ...

During the Housing Boom, prices climbed with unsustainable percentages of year over year growth. Interest rates were low, demand for housing was high, and (in some areas) demand completely outstripped supply. Lenders greedily originated mortgages, lending money to those who would not have traditionally qualified for the loans they received. Not just people with poor credit, but people whose incomes were insufficient for the mortgage should their interest rate reset. Then the lenders bundled up these mortgages and sold them in securitized pools to investors, and repeated the cycle ad infinitum.

The Crash

Due to inflation the interest rates needed to rise to prevent more devaluation of the US Dollar. Concurrently, housing prices reached a point where they were severely disproportionate to incomes. Large numbers of the mortgages that were originated started to fall into foreclosure due to loan rates resetting, job loss, insufficient incomes, etc. Finally, investors started losing confidence in Mortgage Backed Securities (MBS).

Prevention will be as bad as the cure...

The Federal Government will create and offer stimulus package after stimulus package, but none will be successful in pulling the housing market out of it's slump. It's likely that the Fed will move interest rates down to zero percent (not a typo) in an effort to stop the bleed, which will further drive inflation, and further devalue the US Dollar. It is also likely that the banks will continue not to pass on the savings as they try to recover from losses due to the sub-prime bust. The fact is that housing prices have become completely disproportionate with incomes. A deep correction was not only necessary, but inevitable.

The Downward spiral

It generally costs a lender around $40,000 to convert a foreclosure to a bank owned property (REO). Thus, if you find a short sale on the MLS, and you offer the lender $40,000 less than the appraised value of the home, they'll generally accept it, because the numbers make sense.

Consider this example. You find a short sale for $500k (assuming the asking price is also the appraised value), you offer the bank $460K ($40K less than $500K) for the home, the lender accepts. Once a few deals of this sort happens in the area, the new appraised value for comparable homes is no longer $500K, it's now $460K, because that's what the comps will be. Let's face it, once buyers find out that a comparable home sold for $460K, they're not going to offer anymore than that. As the cycle repeats itself, home prices (and appraisals) continue to fall.

The Conclusion

If you bought a home between 2002 and 2007, it may be unreasonable on your part to believe that you haven't overpaid (unless you've bought for pennies on the dollar). Chances are your home is either worth less than what you paid for it, or it will be soon. Prices will continue to fall until about the middle of 2010 or the beginning of 2011. It took about five years for us to get here, and it may take about that long it get back (NOTE: the market started to turn in 2006). If you were thinking about moving anyway, and you have an opportunity to sell, you may want to do so, as any loss you sustain now, you'll likely make up for (and then some) at the bottom of the market;  provided you're currently less than 10% under your purchase price. If the difference is greater than that, you'll have to consider whether you're in a position financially to make a transition.

If you are sitting on the side lines right now and you have cash, be patient. Given this country's uncertain financial outlook, the credit crunch, and the housing crisis, the housing market won't see upward movement for sometime. Even once we've hit the bottom, we'll sit there... for a while.  And if you feel there are good deals now, they will be really good two years from now. Thus, If you buy now, you stand the chance of having overpaid by the time the market reaches the bottom.

Disclaimer

The statements above are based on a combination of my research, speculation, and educated guesses.  You should conduct your own research in order to determine whether action is required on your part, before making any financial decisions.