Lately the biggest news on television has been about the Real Estate market and the sub-prime mortgage mess that our country is currently in.  Given that the “American Dream” is to own a home, and that most average homeowners have a vast amount of there net-worth and personal financial wellbeing tied to their homes, I figured this would be a nice topic to start discussing.

First, let’s get some things straight.  I own a home; in California.  In fact, my home is only 20 miles or so away from the foreclosure capital of the entire United States, Stockton.  The market value of my house has fallen like a rock over the last few years and it currently shows no sign of stopping.  Thank God.

What? You might be screaming to yourself, you’re happy that the value of your house is plummeting? Well, I’m not happy about it, but I’m happy that the market is beginning to correct itself.  Just a few years ago, I was talking with some co-workers about the median income in my city and how the current home prices were simply unsustainable.  We did some quick back of the napkin math and figured that most people could choose to either 1. buy a home and starve to death, or 2. rent and eat plenty.  Over the long term, the reality is that option 1 just isn’t going to cut it.

Now, I’m no central banker, or hard core economist.  I’m just a guy who happens to understand some of the basic economic principals out there and can add 2+2 to get 4.  When you only make 40K a year, and your about to  (when your 0% down option ARM resets) have to pay 28K a year in mortgage obligations, the math just doesn’t work – period.

Since the math doesn’t work, the prices must fall, or buyers must “dry up” – again basic economics here, no buyers  = lower prices – supply and demand at work.  Right now, my house is bleeding about $1,000 a day.  I don’t expect that rate of “burn” to continue, simply because foreclosures are accelerating the price decline.  Most of the folks that I know who have normal mortgage payments as a percentage of their income are not planning to sell at all in this market.  Supply and Demand will begin to turn once the foreclosure inventory is worked through.

Anyhow, back to why I’m happy.  The market has to get real in order to continue to appreciate.  Seriously, do you really think that it is healthy to have the appreciation of your home be 2x your annual salary on a year over year basis?  That is not sustainable and must be corrected.  The quicker the correction – the better.  When prices can move back down to a level were there are strong numbers of buyers, we will be close to a bottom.  The cheap inventory can be worked off, and then supply and demand will take over again.  Prices will begin to move up and that will be a fantastic thing.

Personally, I think the market is getting very close to a bottom.  Inventory is moving and prices are beginning to show some signs of stabilization.   I wouldn’t be supprised if there were another 6-12 months of weakness, but after that I think we wil be in very good shape.

So, what does this mean to an existing home owner?

That depends… Ideally you were purchased a house with some equity and didn’t buy at the peak.  If you don’t have equity, or you bought at the peak you might simply be out of luck and will just need to wait the market out.  This is healthy.  It sucks, but it is healthy – repeat that to yourself every night

If you happen to have a home that still has some equity in it, you might have a fantastic opportunity in front of you. Over the next year or so there are going to be some fantastic deals out there.  Bank owned homes that are out there for the taking will be all over the place.  If you can work together to put together a solid down payment and can part with your home at an emotionally “low” price, you may be able to take advantage of the market and
“move up” on the cheap.

If you’re like me, you pretty much aren’t going to do anything.  In fact, I’m going to be renting my place out while I go to Chicago for Grad School.  Why?  Because the market sucks and I am not prepared to sell my house for its current “market value.” Just a few years ago I was saying – there is no way I’d pay that much for my house… Based upon the current “market value” I’m saying there is no way I’d sell for that little.  We are in the process of swinging the pendulum back and forth, eventually it will come back to the middle and it will be time to sell and move to a new home.

If you’re in the market… Please, please, please, please, please…. Don’t buy a with a stupid mortgage.  ARM’s are not horrible, you just have to understand what they are and what the risks are.  I happen to have an ARM, it is a 7/1, I like it a lot and am VERY pleased with it.  Even in this market, I’m not worried one bit.  Make sure that you have enough equity to purchase, preferably 20% down.  10% will work with an 80/10/10 setup, but do the math and make sure you’re not going to be house poor.

A side note to current homeowners and those looking to purchase.  YOUR HOUSE IS NOT YOUR ATM.  Use that equity wisely.  Do not buy Starbucks Coffee or new shoes with it.  If you are going to tap your home equity (assuming you still have any left), do so with careful consideration, please

Things will get better… It just takes time.  Markets are very efficient.  Buyers and Sellers are not stupid and this whole process will work itself out.  Ideally the government won’t meddle to much and screw things up.  A true bottom needs to be found so that price stability can return and the market can begin to appreciate.