Housing Crisis: Up Close and Personal

Acquaintances of ours decided to refinance their home. Now, mind you, this is a prosperous couple, both employed, in good jobs, never any financial problems. The house is wonderfully located. When you hear that famous real estate slogan—Location, Location, Location—in their case the answer for their residence is Yes, Yes, Yes!! So what happened? Interest rates are way down—and therefore they applied for a new loan to take advantage of that and to refinance their property. They are experienced. The last time they did this, the bank wanted to lend them much more than they had asked for. But at that time they had said, “No, thanks.” This time the bank refused to lend. Why? Here is a graphic that tell us why:

In a single sentence, the appraised value of their home had declined substantially in the recent four-year period as shown. This is not a made up example. Everything you see is based on actual records—although the dark blue bars are calculated to show everything in constant dollars.

How could this have happened? Well, appraised valuation is based on the actual selling price of other residences in the same area. Appraisers must base their judgment of hard numbers, and those numbers come from recent actual sales. In that area, as in most others, the houses that move are foreclosed residences being sold at distressed below rock-bottom pricing. Hence their house is now not only way below the price they paid for it—its current value is now even lower than the mortgage still left on it. They’ve lost not only the totality of their equity but, as you can see from the 2011 bars, they owe payments for a substantial bit of nothing.

Fancy-dancy talk about the Market and Bubbles and such does not void the judgment that not only our friends but literally millions of homeowners have been defrauded by their government—which, in the name of free markets and the wisdom of our financiers, has allowed fraud and speculation to spread unchecked. Yes. This house might not have appreciated as much absent this fraudulent background. But the value of this residence wouldn’t have dropped out of sight as it has.

Fortunately for them, they don’t have to move. They can wait. And things will gradually turn around. But listening to them talk, this experience has certainly put a chill on their general purchasing behavior. I see that as the inverse of the so-called “wealth effect”—which makes people confident because their property is appreciating. To be sure, the bars will start creeping up again. Slowly, slowly. But there are lots of people out there who must move. As for you, reader, don’t immediately go for the blue, brown, red, beige, or green box where your mortgage stuff is filed—or folders, or piles. It might not be good for your health. Ask your doctor first—as the unending ads never stop telling us…