Looking for Pollyanna! Seeing things on the Bright Side this Spring
by Evan Vanderwey on 05/02/10 at 7:31 am
The following few paragraphs are excerpts from the article:
January 29, 2010
Home Equity Won’t Be Coming Back for a Very Long Time
By Lew Sichelman
Google him for the entire article, but a synopsis of it is here:
“There’s no magic online calculator that can accurately tell when the
value of homes will once again equate to what was paid for them, or to
what they were worth before housing prices fell off the cliff.
“It’s going to be a long time coming,” says HSH vice president Keith
Gumbinger of the prospects of rebuilding “lost” equity.
Of course, it’s impossible to accurately predict anything about the
current state of housing.
Going forward is pretty much a toss-up, but HSH is proscribing a flat
real estate market with no increase in value through June. Then, from
July through August 2011, a period of 14 months, prices are projected to
increase at a rate of about 2.5% a year. And from then on out, the
company is figuring on a yearly gain of 3%.
With these percentages in mind, let’s look at what happens to the value
of a $200,000 house purchased at the top of the market in July 2006:
By the time the market hits bottom – at least the bottom, according to
Case-Shiller – that property was worth a paltry $134,800, a decline of
32.6%. Using HSH’s assumptions, the value of our imaginary house won’t
get back to the $200,000 the fictitious buyer originally forked over for
it until July 2022.
That’s right. It will be 12.5 more years until this house is once again
worth what was originally paid for it.”
How’s that for depressing!
I have done calculations like this one with my excel spreadsheet 100s of times. Having the information can be helpful, but writing an article with this as the only conclusion is misleading. There are at least three reasons why this article should not have hit the web the way that it did.
First, this analysis is riddled with predictions about the future. He even says three or four times that there is no way to know what will happen, but then begins to make huge assumptions – this is speculation at best.
Second, he is using a national index and drawing conclusions that people in Grand Ledge, MI will apply to themselves. There is no normal, no one is actually average.
Third, his analysis is myopic. It only looks at the “problem” and sees nothing else.
For example: If this whole housing collapse did not happen, then neither would have the following (non-exhaustive) list of opportunities:
1. Mortgage rates on a 15 year fixed rate loan in the low 4s – allowing this same homeowner who follows sound advice to make a payment similar to what they were previously paying and eliminate their loan 10 or so years sooner. So even though that particular home may not reach the price the homeowner paid for it for more than a decade – it WILL likely have the same amount of equity in it. Your balance sheet can improve even with declining assets when you deleverage.
2. A stock market that is currently offering equities at a price that gives the same number of shares of the same great companies but for 1998 prices. Even $100 per month invested in the average 401k of the average American is a huge gain over the same 12.5 years that would not have otherwise been present.
3. Bank owned homes are being offered for sale at prices 50% of their previously offered price and sometimes even better than this. Two or three families getting together to make an investment can purchase a nice investment property, fix it up, and rent it out to a less fortunate family for about $45,000 ‘all in’ in many communities around the country. Later, they may sell this home to the tenants securing a fair profit for themselves and a warm home for a family in need. Families on both sides of the transaction benefited from the low price.
4. Inflation right now is almost flat. The price of most living expenses is not rising. We are not losing buying power on our current cash. In fact the bond market has factored in an inflation rate of only 2.7% for the next 10 years.
These are just a few of many opportunities or positives that did not exist three years ago and would not have existed if it weren’t for the “crash” of the housing bubble.
A few cliche’s
~Today, a dollar saved is truly a dollar earned.
~Money is relative.
~When God closes a door, He opens a window.
In other words:
When something really negative happens, look around you for opportunity; its likely everywhere. If you include in that motto – helping others (like in #3 above) – you will do well by doing good.
This has always been true but never like it is at times like this.
Someone ought to tell the guy who wrote that article to hang out with Polyanna for a while and go look on the bright side!
