Coping with “Paper Loses”

One of the interesting phenomena in the real estate market lately is the “paper loss” in equity for many home owners. I run into it all the time, especially with older home owners who’ve owned their homes for 20-30 years. Many of these people bought their homes in the 70’s and 80’s and have lived there ever since. Many bought nice 3-4 bedroom colonial homes in nice subs for $60-70K in those years, some for even less. For years they’ve been watching the assessed values go up, and most have realized appreciation that they believed now values their house at 200 or 300% of the original value. “Believed” is the operable word and it’s all about “paper values.”

I’ve been reporting for some time now that the only people who though that property values have continued to rise over the last few years are the assessors and the home owners. Township assessors have a vested interest in continuing to raise the value of the properties in their townships. After all, that’s how the township raises its money. And the Headlee amendment did allow for the assessed values to continue to rise 5% or the rate of inflation each year, so why not continue to do 5% each year, even if the real estate market wasn’t staying with the program.

In reality we haven’t had significant appreciation since the 9-11 terrorist incident and have had actual depreciation over the last two years. Don’t tell the assessors—they're still acting as if everything is appreciating 5% a year. But, home owners who now need to sell are discovering the truth. Their homes are worth far less than the assessor and they thought, sometimes 10-15% less. This disparity isn’t all the depreciation that has been in the news lately, although that is very real. Much of it is the paper losses that have mounted up as the homeowners and assessors got further an further out of line with the market. Since most homeowners didn’t do a yearly market analysis with a Realtor, most never realized what was happening. The few that may have done an appraisal to help with a refinancing or equity loan likely hit the appraisers in that happy mood before the Feds got on their cases about their optimistic appraisals (I’m giving them a break there). So appraisal numbers that are more than 3-4 months old are useless and most often way too high.

The truth is now coming home to roost for many of these homeowners, who are trying to cash out for retirement. They are now seeing that the values they thought was there is not as great as they thought or had been led to believe. They are taking “paper loses,” at least in their minds. For some this is very tough, because their homes were their retirement piggy banks. For the most this is just another disappointment in a landscape full of stock losses in the early 2000’s and the loss of company-paid benefits that most had counted on being there.

What everyone needs to come to grips with is that these are just paper losses. The house that cost $60-70,000 in 1978 is now worth only $260,000 and not the $300,000 that your thought it was worth. But, look at the good news—you bought something 30+ years ago and got lots and lots of use out of it and now its worth 370% more than you paid for it. Wow! What other physical asset do you have that you can say that about? Maybe if you bought just the right “muscle car” in that same era and kept it stored in pristine condition, it would now be worth more than your house. But, if you bought it and drove it for 30 years, what would it be worth today?

So, be happy. And if you resisted the temptations to take equity out along the way, you should be in great shape. Have you taken a loss? Only if you let yourself think that way. You made out pretty