Homes Are Not Piggy Banks

It is only 10 days before Christmas, and to some, what I am about to say will sound like Santa Claus but to others, Scrooge.

But sometimes you just have to say it like you see it. The real estate market, depending how you measure it, hit all-time highs in 2006-07 in the Newport Beach/Costa Mesa area. Homes had more than doubled in value in less than four years.

Now, sales activity has dropped off a cliff and won’t return until prices drop enough, across the board, to get first-time home buyers on the first rung of the housing ladder.

Looking at the data, we can see the average home in Costa Mesa’s 92626 zip code went from around $350,000 in 2002 to over $700,000 in 2006. Newport Beach’s 92660 went from an average of about $500,000 to more than $1 million during the same period. More than a 100% increase in four years.

To get homes selling again, we need to understand how we got here in the first place. The increase in sales prices can be put at the foot of lenders who loaned people money to buy homes with no down payment and no verification of income.

To put it bluntly, if you could fog a mirror, you could get a loan. Welcome to Wall Street’s invention: the sub-prime loan.

In a market like Orange County, with very little supply, it does not take much increase in demand to rocket home prices up. With these sub-prime loans in hand, buyers bid up all available houses.

People will always bet with other people’s money if they have nothing to lose. Prices go up, I win; prices go down, the lenders lose.

If a buyer actually had to come up with a $20,000 or $30,000 down payment, they might not bid up home prices to where they could afford only the house with a temporary teaser rate that lasted long enough to move in. Prices were being forced up by people that had no skin in the game.

So now that sub-prime lending is over and buyers will actually have to pay for a house, prices will have to move down to what people can really afford.

This already happened in the new home market where builders have to sell homes for what people can actually pay in this post sub-prime market.

Take a look: New homebuilders are selling homes at 2005 prices. It’s a great time to buy a new home.

What about buying a resale home, which makes up most of our market? Do not waste your time trying to buy a home unless a seller is really motivated to sell.

For the most part, the only sellers who are really motivated have no equity and their lenders have agreed to accept less than what is owed on the house.

This is what is known as a short sale. Instead of foreclosing the lender, knowing they are about to have a loan go bad, decides it is better to take a loss now with an orderly sale than to have to go through the foreclosure process and end up with a vacant house, which they have to sell anyway.

Vacant houses do not show too well. Well that’s what happens when you loan 100% of the sales price.

Lenders have already written down $76 billion in real estate-related loan losses in 2007. But this is just an adjustment on their books, and until they foreclose or do a short sale, it will not be reflected in the home prices.

Home buyers can get only part of that $76 billion if they make an offer to buy, at a price they can afford. Call your local Realtor, you would be surprised what lenders will accept. Most large lenders have already staffed up their short sale departments, but be patient after you make your offer. This may take some time.

The reality is that more than half of the homeowners in the above zip codes paid less than the lower of those two numbers because they bought their homes prior to 2002. Many bought much prior and for a lot less.Whether you live in a $700,000 home or a $2 million home, most of you did not actually pay that much for your house. In fact, chances are you did not pay half of that amount.

The point I am trying to make is that the fluctuation in home value for most people should make no difference in their lives.

A home is a place to live. It is not a piggy bank. For those who bought their house after 2005 with no money down, you probably have no equity. But if you can afford your payments, pay down your loan and enjoy your home. You will be OK over the long term. Merry Christmas.