How'd this happen?

Lots of my customers can't understand what has happened to the "value" that they though was in their houses. The chart above is from the Federal Office of Management and Budget and clearly shows what happened. Until the late 90's, the housing market was appreciating at a historic rate that was tracking along with general inflation at about 3-5% per year, depending upon the year. Then in '98 or '99 things took off and all of a sudden we were seeing double digit appreciation. So a home bought in 1980 doubled in value due to appreciation between 1980 and 1999 and then doubled again in just a few years - 1999 - 2004.

Does that make sense to you? It didn't make sense to the market for long either. What this chart doesn't show is the drop in values once the bubble burst. However, if you look below, you'll see that the trend line the we were on, prior to their run up is likely going to be the landing zone for where prices are falling.

So what does this mean? Well for one thing; if you bought a house in 2000 for $200,000 it means it is more likely to be worth $250,000 today than the $400,000 that you may have thought it had appreciated to, at least as the historic trend line would indicate. Unfortunately, as prices fall back down towards the historic trend line, it also means that if you bought a house within the last 2-3 years, it was likely overpriced by as much as 25% against the historic trend line - more in many "hot" areas of the country.

We weren't as bad in Michigan in terms of the run-up in home values as , say, Florida or California or Nevada; however, we did let things get out of hand. When I first got into real estate back in 2000 I can recall that prices were appreciating in the high single digits or low double digits in some places in this area. Even the assessors couldn't keep up and one used to have to multiple the SEV by about 2.2 to 2.4 to get the market value. That is now down to an average between 1.3 and 1.4 times SEV, since the assessors overshot the market on home values too.

Like any "bubble" situation, the only way out is to deflate the bubble - let "value" out of the homes. It's disappointing to many and disastrous to a few. Those who bought in the 70's and 80's and have held on, without succumbing to the temptation to take equity out of their homes are doing OK. They feel bad about the "loss" of value, but it is just a paper loss. Those who bought during the run-up have actually lost real money already and will have to hold on for years, just to break even. Those who used their homes as piggy banks, taking equity out at every opportunity now find themselves upside down, with loans that are much greater than the value of the house, many of them "toxic" ARMs that are now resetting to high rates. Those are feeding the foreclosures market that we see all over.

Obviously easy money was a major contributing factor, but it was human nature that did us in - again. It all started with the snake and the apple in the garden of Eden and goes on today, with slick Willie the mortgage loan officer holding out the apple of easy mortgage money. I suppose we are forever doomed to repeat this mistake, either in the stock market or the housing market. It's human nature.