As property values continue to decline in 2011, some are suggesting renting is better. It could take as long as a decade before property values begin to swing upwards again.
Shadow inventory – the supply of properties in default or foreclosure – continues to be quite large, stagnating values which have dropped, on a national basis, more than 28% since 2006. While foreclosures show signs of slowing, the volume of homes that remain in default or at risk continues.
More people are discovering that their property value is less than the value of their mortgage. As a result, home inventories remain high. Shadow inventory does not include homes that normally come on the market for sale without distress.
Meanwhile, finding it difficult to cut costs, municipalities, counties and states are maintaining or increasing property taxes to make up for shortfalls in other tax revenues. This has the negative effect of causing more people to reconsider the operating costs of home ownership, driving more to become renters rather than owners.
With the asset backed securitization markets still in turmoil, banks have less money to lend, and combined with new regulations, credit remains very tight. Even qualified home buyers prepared to put as much as 40% down on a home are experiencing difficulty finding a willing lender.
As property values bottom out, we expect that values will begin to rise at nominal rates of 1% to 2% annually over another five to ten years. Ultimately, this adds further incentive to to rent instead of buying as it will take as long as 20 years to build reasonable equity in the home purchased today.
The decline in value, in some markets more than 80%, has wiped out the equity built up in homes purchased over the past decade, leaving many homeowners owing more on their mortgage than the home is worth in today’s open market.
All this is the result of the foolhardy manner in which mortgage originations were made during the last 12 years, and little is being done to truly improve the process. A mortgage broker, for example, would advocate for a client, resulting in the bank’s appraiser increasing the value of the the appraisal above true value by as much as 10%. As that home sale is recorded, and another similar home in the neighborhood is appraised, the second appraiser is compelled to use that inflated value as a benchmark.
Continuously, if appraised values are inflated, the true value of homes was disguised, and it appeared that values were rising over 12% annually, when in truth, the real value increase was closer to 5%. Inflated property prices and easy credit drove consumers to buy, further driving up valuations. Eventually, that bubble burst, collapsing inflated values, but not yet reaching a true bottom.
Until that bottom is reached, correcting the mess made between 2002 and 2007, more homeowners are likely to discover that they are better simply walking away or allowing the bank to foreclose.
This double edged sword has the horrific side effect of hurting the homeowner’s credit for as long as a decade, making it nearly impossible for that individual, even if fully qualified otherwise, to buy a new home for years to come. Additionally, the continually rising number of personal bankruptcies resulting from this crisis will keep even more Americans out of the real estate market for decade or more.
The problem is not uniquely American. It’s happening in Ireland, Greece, Spain, Great Britain, Italy and other nations around the world, wherever the property values rose excessively.
The cure? Only time will cure this problem, and the restoration of the securitization market. Even then, the cure will take perhaps as long as 20 years.