Archive for April, 2007

A tremor in the market.

April 13, 2007


I know that my last two posts have focused on the continued problems in the sub-prime mortgage market, and, as much as I would love to move forward to another topic, the “force” of this problem seems to be getting stronger and stronger and will certainly affect every single homeowner in the entire United States.

So you don’t have a sub-prime mortgage? And you don’t have an adjustable rate mortgage? And so you assume that you are safe?  Well, that’s what the peaceful inhabitants of Aldreaan thought, too. 

A recent article from estimates that as many as 1 million homeowners may be foreclosed on in the next 6 years.  And while some Democrats are already petitioning to have the government step in to help bail-out troubled homeowners, this billion-dollar-plus price tag is sometimes too abstract for your average American (like me) to get his or her brain around — and the response to the prospect of the US Government losing billions, or spending billions, is kind of like, “yeah, so what?”  However, when it comes to 1 million houses being foreclosed on, it will matter and you will feel it . . . maybe not right away, but when you are ready (or think you’re ready) to sell your house, you’ll feel it, right in your bottom-line.

Here is the problem (for Mr. or Mrs. Good Citizen Homeowner) when it comes to either foreclosed homes or even homes where sellers are looking to get out in a hurry.  The value of your home is constantly in flux.  Although it is hard for most people to realize, possibly because we don’t receive monthly statements in the mail about our home’s value like our mutual fund accounts or our 401K accounts, the value of your home is constantly changing. 

Unfortunately, with house values steadily rising over the past decade, most homeowner’s (me included) feel a certainty and security (false, by the way) about our home’s value.  I bought it for $xxx,xxx . . . we have lived here for 3 years . . . times 5% appreciation per year . . . so my house must be worth $xxx,xxx now.  Right?  Wrong.

Although some will read this and not believe me, your home’s value is only as good as your last three, most-recent, comparable, neighbors’ sales.  Ultimately, it doesn’t matter how much you paid for the house, it doesn’t matter how long you have lived in the house, it doesn’t matter that your house is decorated prettier than the other houses, or that it is cleaner than the other houses.  All that really matters is how much the last few houses sold for in your neighborhood.  I’ll write more next time on appraisal reports and how values are calculated, but just trust me on this one.  Your house’s value is only as good as your last three, most-comparable, most-recent sales.

So let’s assume that one (of the one million) troubled home owner’s lives in your neighborhood.  A foreclosed home resold by a lender or a home sold by an adjustable-sub-prime-mortgage-troubled-seller — both who are willing to take drastically less $$ for the house — will essentially reduce the overall value of a neighborhood. 

So, what are the chances that all of this sub-prime mortgage debacle stuff will just go away, never to affect the average Joe homeowner.  Probably about the same as “successfully navigating an asteroid field . . . approximately 3,720 to 1.”  – C-3PO