Tuesday, October 18, 2005

Risk of Home Price Declines Rising

In the last eight and a half years, the country has experienced an unprecedented run-up in home prices. Over this time, the rise in home sale prices has been more than 40 percentage points higher than the overall rate of inflation. The increase is said to have begun turning in on itself.

It seems that the risk of price declines over the next two years has increased in the nation's 50 largest housing markets, according to the latest PMI U.S. Market Risk Index, whose median risk index value rose 11.6% in the third quarter.

Homes in Gotham got a little more affordable in the third quarter...or rather,prices dropped, but they still remained in nosebleed territory.

It is likely that the regions experiencing the largest run-up in home prices will see the largest fall during the crash. For this reason the New England region is especially vulnerable to a downturn in the housing market.

How would a drop in home price values impact the economy.
In 2002 a research an economic policy and research firm, cepr.net predicted the following:

The collapse of the housing bubble, implying a drop of between 11 and 22 percent in the average of housing prices , will destroy between $1.3 trillion and $2.6 trillion in housing wealth.

7) In the wake of this collapse, residential construction is likely to fall by between 0.6 and 1.3 percentage points of GDP.

8) The loss of this much housing wealth will reduce consumption by between $80 and $160 billion.

9) The average ratio of homeowner’s equity to value, at 55.2 percent, is near its low for the post-war period. A sharp drop in home prices will send this ratio far below its previous low point.

At the present time there is much wealth in ones home. Were one to attempt to capitalize on it the only way to sustain that wealth would be to turn it over into high yield investments and turn over the returns as well. In other words the equity wealth would be made to make income at a rate that offsets the mortgage payments that far exceeding the home value.

Many homeowners first lowered the mortgage rates in order to free up funds for such an investment. Other then took out home equity loans purely for the purpose of investment and debt resultant debt reduction.

Using ones home as collateral is always a last option when needing funds. Still when there is no option many have used some of the borrowed funds to invest in education, small businesses or purchase precious metals or some other more certain profit generating venture.

Offsetting debt by investing for higher returns in or to pay off debt more quickly is always the wisest course to take.