Home values are way down since the housing market hit its peak in 2006. The S&P/Case-Shiller Price Index, which is a measure of the home values in 20 metropolitan statistical areas is down by nearly a third since the market peaked. Although home prices were briefly buoyed by the 2009 and 2010 home buyer tax credits, they have now hit double dip territory, at least according to Case-Shiller. Different measures of home prices have yet to show a double dip, but they are all trending downward.
Since 2001, the average home equity has declined from 61 percent to 38 percent as of the first quarter of 2011. A recent report from Harvard showed that home equity went from $14.9 trillion in the first quarter of 2006 to $6.3 trillion in the fourth quarter of 2010. Home equity is now at the lowest level since World War II according to a new study from the Federal Reserve. By any measurement, this is pretty much an utter disaster.
A CoreLogic report released recently showed that 10.9 million American homeowners with mortgages are underwater (owe more on their mortgage than their home is worth). This accounts for 22.7 percent of all residential homes with mortgages. An additional 2.4 million more borrowers had less than five percent home equity.
Although price declines are not evenly spread, many people won’t recover their home equity for years, if at all. This problem is especially acute for many baby boomers who are approaching retirement age. Some people planned to fund their retirement with home equity and may have to delay those plans due to declining home values.
We’d love to hear your feedback on this situation. Will declining home values delay or change any retirement plans you had made? Are you, or someone you know, currently dealing with an underwater mortgage? Use the comment link below to sound off about the housing situation and how it’s affected you or your family. Your email address will never appear on our site along with your comments.
If you’re a homeowner, chances are your house is worth less than it was five years ago. But you could still be paying more to insure it.
Despite the deep housing bust of the last few years, the cost of rebuilding a damaged home — in other words, what you pay insurance for — has not changed much, according to industry experts.
That means that unless you have reduced coverage or increased your deductible, chances are you are paying as much or more to insure your home as before the housing bust.
In this topsy-turvy housing market we’ve seen in the past few years, it’s possible that the cost to rebuild your home is actually more than you could sell it for. The insurance also usually must be enough to cover how much is owed on a person’s mortgage, even if that is more than the value of the home. These days, it’s also possible you owe more on your house than you could sell it for.
Still, experts say that doesn’t mean you should accept a big jump in your insurance rate when you get your next bill. After all, a big factor in rate increases could just be the inertia of simply accepting the new premium each year.
You should look carefully at your bill to see why it has increased. You also might want to check if you can reduce your rate by making home improvements such as adding a better fire prevention system, or making lifestyle changes such as stopping smoking.
It’s also a good idea to shop around to see if another provider can get you the same coverage for a lower price.
A 2008 survey of Consumer Reports subscribers found that about half of those who switched insurance carriers in the prior four years were paying less for coverage.
While a really great insurance rate may be alluring, you should be cautious in accepting a new policy purely based on price. Check consumer websites and your state department of insurance website to make sure that your insurance carrier will treat you well in the event of a claim.
When you’re buying insurance, all you’re buying is a promise.
Steps to limit price declines may have helped, but economic growth is now critical.
Home prices in twenty major metropolitan markets dropped 1.3% from September to October, the third straight month-over-month drop, according to the December S&P/Case-Shiller home-price index released in late December. The decline erases a significant share of the modest gain in home values since prices hit their bottom early in 2009, and raises the risk of a double dip in home values over the next year or two.
Economists have been mixed in their views of the likelihood of a double dip in housing values. Peter D. Schiff offered one of the most pessimistic views in his December 30th Wall Street Journal opinion piece “Home Prices Are Still Too High.” He noted that the average annual home appreciation over the twentieth century was 3.35%. If you apply that historic appreciation rate to average 1998 home values (a previous peak), today’s homes are still overvalued by 20.3%. Schiff argues that once government programs to prop up home values are removed, home values will actually drop more than that, perhaps by another 24 – 28% because of unfavorable economic factors, including current unemployment and national debt levels and depleted personal savings.
There are other reasons that support Mr. Schiff’s pessimism. Right now there’s still simply more housing inventory than people who can afford them. Many potential first time buyers already made their move when the tax credit was available. A good share of the remainder probably still remains cautious and the recent declines in home prices will not bolster their confidence. Not everyone is so pessimistic. At the other end of the economic projections are real estate sector trade associations, who habitually issue optimistic projections, perhaps to encourage consumers to buy now, before the price goes up.
The American Homeowners Foundation thinks that we are at or fairly near the bottom of housing prices. Even though prices could soften a little more during 2011, the prospects for improvement in the housing market by the end of the year, and sustained growth thereafter, are better than 50-50.
Mr. Schiff’s views are overly pessimistic for several reasons. Applying a long term growth pattern to a uniform product is realistic, but single family homes are far different today than they were in 1900. The average new home built today is about twice the size of a new home built in 1950, and as the older homes are replaced there is an inherent increase in home values that his analysis does not take into account. If you compare the share of disposable income spent on food in the U.S. today compared to 1900, a logical conclusion might be that most Americans must be starving. A look at the size of the average consumer in a local mall on any weekend would absolutely dispel that notion.
While Mr. Schiff is correct that employment will be a huge factor in housing demand, employment increases always lag behind improvements in other U.S. economic indicators. We are beginning to see healthy improvements in many of those. Retail sales improved substantially over the recent holiday season, and have returned to levels just prior to the recent recession. U.S. manufacturing continues to expand and our exports are back to where they were just before the financial meltdown. Recent surveys show that optimism levels of business heads have also returned to near pre-recession levels. The payroll-tax cut for most workers in the tax package passed last month will also fuel employment increases.
The government programs to help prop up home values were realistically only a bridge to break the free fall in home values until a recovery could take hold. The foreclosure rate in many areas is beginning to decline, most likely because a large share of those homeowners who were or will be in trouble have already worked their way through the system. Some of them are already beginning to work off their excess housing inventory. As those temporary government price support programs begin to expire, there is a good chance that increased housing demand will kick in and prevent housing values from dropping further. If that ends up being the outcome, they will have accomplished as much as could be expected. As new jobs are created that will accelerate. The aforementioned economic indicators suggest than a recovery is in the offing.
It remains true that significant increases in housing prices in most markets will not take place until job growth picks up substantially. Nevertheless, recent indicators suggest that we will begin to see healthy job growth in the coming months, and some predictions are for a healthier housing market by the end of 2011.