Who disagrees that house prices will continue to fall?

EthanR answered 10 months ago …

MNSL, this answer will be a bit long, so excuse my long windedness.

I disagree that house prices will continue to fall indefinitely. There is one factor that everyone seems to overlook. Houses are not like stocks. If I buy 100 shares of GE at 20, and it falls to 10, I can sell it and take a loss, because I still get back part of the money that I invested. I may not want to sell at 10, but I can if I have to, or if I think GE is going to 5.

However, with a house, most people put down a small amount of money, and the rest is financed. Let's say I buy a $150,000 house, with an FHA loan, 3% down. That means I have put down $4500, and financed $145,500. Now maybe the house appreciated a bit before the market peaked, but realize that most people move within 5-7 years of owning a home. That means that most people bought their home in 2002 or later. Since the market peaked in 2006 (some areas in 2005), this means that very few people have a home that is worth more than they paid for it right now.

Ok, so I owe $145,500, minus maybe a few thousand in principal that has been paid off since the purchase. For the sake of argument, lets say I owe $143,000. If my house is only worth $138,000 right now, then even if I want to sell it, I can't. Because after I pay closing costs and most likely 5-6% commission to a Real Estate brokerage, even if I am lucky enough to get $138,000 on the sales price, my NET is only going to be about $127,000. That means I have to bring $16,000 to the closing to pay off my loan. Most people who own a home in this price category do not have that much cash to be able to do that. So it means they can not sell.

The example above was one in which the buyer bought a few years before the peak. All the people who bought just before, at, or just after the peak will be even more upside down. So what does this all mean? It means that if people can't sell their home, then they won't list or they will remove their homes from being listed. That will create a reduction of inventory, and create a balance once again between buyers and sellers. The main reason that prices have fallen in the past 2-3 years is due to high levels of inventory that signified more supply than demand. But once we reach prices from 2002 or 2003, the inventory must fall off.

Banks will not do short sales for people who are current on their mortgages and have the ability to pay, so do not look for the banks to reduce the prices. The only homes that you will see falling below 2002 levels are foreclosures and short sales for people who can't make their mortgage payments. But regular sales will find a floor under them at 2002 levels. And that is why I disagree that house prices will continue to fall.

And also, let me add that there are people who want to buy a home but could not afford the 2006 prices. Now that prices have fallen to roughly 2003-04 prices, and interest rates are still low, they will begin to buy. I think we will see a bit more demand in 2009 than we have seen lately. The trouble is that many of them will not get financing due to increases in credit score minimums, so they may have to wait 6-12 months longer than they intended.