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Tuesday, July 1, 2008

Business Week and the Housing Abyss

This week’s Business Week features a front page story on what they are calling the Housing Abyss. Citing various sources they document the rather precipitous decline in home values in several key markets. Like most national publications, they tend to focus upon the coasts and a few big markets in the southwest – Las Vegas, Denver, Phoenix. The Midwest does get a mention (is that good or bad?) for the declines in Ohio and Michigan.

What they have apparently just discovered is that this whole declining value thing has turned into a self-fulfilling prophesy and has now started to feed upon itself to make things worse. The trend was started by the increase in foreclosures, which were mainly due to bad loan decisions in the early stages. That trend snowballed when the economy started reacting by also going down and taking many honest, hard working people down with it. It was exacerbated by the reset of ARM loans that pushed many people over the edge on their ability to keep up. Then the banks started making it harder to get loans and started imposing a “declining market” penalty to appraisals, such that most houses that were financed or re-financed over the last few years are now under water (the owners owe more that the house is worth). The banks made sure that their view of the market as declining came true.

Add to all of that the rise in energy prices and all of the increases which that caused and the fall in stock prices and one ends up in the perfect storm, according to Business Week. They couldn’t find anything good to say in the whole article. Even the parts about the work that the government is doing to pass legislation they considered to be too little, too late. About the only point that they made that could be taken as good news was the portion about it being a good time to be a buyer, if you have the wherewithal to put 20% down on a house.

OK, so we’re staring into the abyss. What is one to do, if you had hoped to sell your home? You could assume fetal position and whimper loudly; or, you could take to the bomb shelter and not come out for several years. Neither is a very appealing strategy. I’d suggest that you take Dr Phil’s advice and GET REAL, DEAL WITH IT. You can’t hope the current crisis away, nor can you deny that it affects you and your home – it does.

So, get a good Realtor to help you understand what your house is worth in the current market and then use that Realtor to make sure that you get at least that much, and as quickly as possible. You likely don’t have enough time to wait out the current market downturn and wait for the value to get back to where you thought it was. It is likely to take 5-8 years to get back the value that has already been lost.

Sit down and figure out what you owe on the house and what it costs you a month to keep it. Anything that you can get above what you owe is all good and the sooner that you sell the fewer times you’re going to have that cash outflow on this house. Remember to use "the magic number" - .925 - as a quick guide to help you with pricing. If you come up with what you need to just break even, divide that amount by .925 to find the purchase price at which you would break even. Once you are on the market, multiply any offer price by .925 to get a quick feel for what you would have, after the cost of the sale is removed, to pay off your mortgage(s) and put in your pocket. Sometimes it may make sense to take less that you owe (bring money to the table), just to get out from under the monthly obligation, especially if you are in a situation where you are slowly chipping away at your savings, just to keep up with this house.

The important thing to try to do is to price to the market (that’s where that good Realtor mentioned above can help the most) and not to what you “need” to get. The market is cruelly efficient and just doesn’t care what you need or want for the place. The market only cares what houses that are similar to yours are selling for now. You may get a slight premium over the market average, if yours is in the best condition among all similar houses, but it won’t be 10-15% more.

The good news is that houses are selling. Buyers are out right now, trying to get into a new home before school restarts. You can avoid being sucked into the abyss. Sell it now!

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