This post is part of our feature on Money Losers of 2008. See all 20.
For a second year in a row, American homeowners are among the biggest losers of 2008. In 2007, predictions were that American homeowners would lose over $103 billion. Now at the end of 2008 the number jumped to losses of $2 trillion as the value of homes continue to fall with no end in sight. As job losses increase, even more families will be forced into foreclosure.
Homeowners who bought at the top of the housing bubble between 2005 and 2006, could wait decades for the prices to reach that level again. People who must move for a new job or family crisis find they either have to come up with cash for closing (if they find a willing buyer) or they must walk away from the loan and give the house back to the bank either through foreclosure or through a deed-in-lieu of foreclosure.
The housing bubble that started to inflate in 2002 and burst in 2007 drove housing prices way out of the normal range. The normal ranges for housing prices track these measures:
- Income: The house price should not exceed three times your average household income, which was true from 1950 to 2000. In 2006 the average household income was $66,600, so the average home price should have been about $200,000. But during that year the average home price was about $300,000.
- Rent: Traditionally homes sold for about 20 times what it would cost to rent the home. In 2006 that number jumped to 32 times. Until prices fall back to the 20 times number, we won't see stabilization of home prices.
- Appreciation: Between 1950 and 2000, the normal increase in home value was less than 0.5% per year, after adjusting for inflation. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked at a 12.3% jump in 2005. Housing prices began to fall in 2006. Unfortunately for those who bought near the peak of the bubble, they may never recover their loss. Bubbles drive prices to a point that cannot be matched.
This bubble was inflated by easy money terms for mortgages through optional payment mortgages (where people could pay even less than the interest owed and continue to add to the principal of the loan), no verification of income (these liar loans allowed many to qualify for a home even though they couldn't truly afford it), and tiny down payments (in 2007 down payments of 0% were allowed through some of the riskier loan options on the market).
Once the bubble burst, those shaky loans started to collapse, which began the flood of foreclosures. This scenario should not have been a surprise to anyone. It's exactly what happened before the Great Depression. While the type of loans were a different structure, shaky loans with low down payments that encouraged people to buy what they could not afford drove the prices up then too.
The New Deal came to the rescue. The government took control of millions of loans and restructured them. That plan isn't much different than options being considered today. Without a rescue, foreclosures will mount driving house prices down further and pushing even more people into underwater mortgages that they end up walking away from.
Credit Suisse predicts that by 2012 16% of U.S. homes will be in foreclosure -- that's about 8 million. Hopefully the government will prevent this downward spiral that is now threatening folks who put down 20% or more using fixed rate loans and are stilling getting caught up in this perfect storm.
Lita Epstein has written more than 20 books including Surviving a Layoff and The 250 Questions You Should Ask to Avoid Foreclosure.
Be sure to check out more Money Losers of 2008.
Comfort Zone Investing: Why GE's Dividend Increase Matters
Six Deadbeat Stocks to Clean Out of Your Portfolio
Federal Reserve Ordered to Release Bail Out Documents
Reader Comments (Page 1 of 1)
12-24-2008 @ 6:41AM
Iridium said...
Another major fault was due to the nations realtors that conspired to raise prices to inflate commisions.
They are as guilty as anyone else. The realty association needs to be dissolved. Commissions need to be changed. Sorry all you realtors out there. Your service isn't even worth 1/10th of what you charge. Wow you show a house and sell it. You do some paperwork. Big deal I'm sure someone that works behind the counter of the UPS store has a harder job than you.
$66,000 is also very very high for the average income. If you remove the top 10% which scews the number heavily you would find the avergage income is closer to $45k. That means the average house should cost closer to $150k.
12-24-2008 @ 6:40AM
Nan said...
You got that right .i bought a new homes ten years ago that went for $104,000 then .the same homes is around $260,000 n0w anyone that has a brain would not buy a home over $159.000you will never own it in your life time.unless you are a millionaire or work 60 hrs a week.The big problem in new homes is they cost to much for the average American.Now the ones that will sale arew the older homes in the $76..000 to $125 .000 range .What they did was price us out of the American Dream with the greed of Realitor,When you know what a homes cost ten years ago and the price of it now will keep people from the housing market for a long time .Homes aren't worth what they are asking for them !!!!!!!!
12-24-2008 @ 9:00AM
BHarrison said...
Enough is enough . .; . after having lived modestly and prudently for many years, I have absolutely no sysmpathy nor empathy for those who have lived beyond their means or invested in extremely risky investments or lived beyond their means via credit . . . these people ARE RESPONSIBLE for their own financial problems. They ARE responsible for their own economic demise.
It has already cost me over $20K in 401 K losses, and losses that will occur due to the tax ramifications, and devaluation of the US dollar in the future. I've "done my share" to help these people . . . and that was done without my agreement and consent by Congress.
From this point on, these irresponsible parties should be on their own to resolve their problems. The people who deserve assistance are the retirees who can't work productively any more and have been financially devastated by these frauds, and now those who lived within their means and are now becoming unemployed, etc. . . .
Those people, like three of my neighbors who paid approximately $500K for homes that originally costs $165K, and used ARMS mortgages, DESERVE to lose those homes, and to suffer the consequences of their irrespoonsibilities. I don't wish them "ill will"; but I am not going to lose what I prudently saved by living modestly, to "save them" from their economic wreckless gambling on "gaming the system". If they can't afford those large and expensive homes, then they need to rent whatever they can afford . . . . that is THEIR PROBLEM.
It is time to just let the economy "settle out" based on the "natural readjustment" of the economic factors. There will be "winners" and "losers". Life can be brutal for those who act imprudently and wrecklessly. We cannot save these people without destroying or losing what we have built and saved for our families.
12-26-2008 @ 10:31AM
dr. maxx dredmon said...
I bought a few rag tag homes for too much money like may did. But I knew they werent worth it, so the olny logical thing to do,was to make them worth it! I got small 2 bdroom, 1,200 sq ft homes in Los Angeles and added 2,000 square feet to them. Mostly big empty great rooms and more bed rooms, but with Calfornia labor being about the cheapest in the USA and the price per sq ft being the highest you cant lose, even now 1 day after xmas it's still a good investment. At the peak west valley homes were at 765.00 per square foot. I can build it for 80.00 to 110.00 per. Instant equity is obtained by adding square footage. Period When a homes price exceeds 3.5 times the cost of building it , it will come down. Ex; 2004, 1600 sq ft woodland hills home 554.00 per square foot,9,000 sq ft lot. I added 1,450 square feet at 100.00 per sq ft avg. Sell it a bit below market so the buyer has some equity, and makes the bank happy too. I could have built it 3 X and still made out well! The home is actually worth about 120 150,00 per square foot tops. More is more when it come to homes. The homes and the stock market that hinges on them will be corrected to a reasonable cost of building the homes and the affordability ratio of people who can afford to buy them, and this is all based on the cost of labor. Illegal labor is plentifull and cheap, and 5.00 an hour these days in LA and it drags down all the other related industries ,but they need someplace to live too, Hence the cunundrum. Avg home is actually worth 110.00 dollars per square foot.
2-05-2009 @ 3:12PM
Paul M. Westgate said...
Question: How many home foreclosers were there in 2006, 2007, 2008?