The Truth About Property Values

The traditional common wisdom about Florida real estate was that most properties appreciated somewhere around three to five percent (3-5%) per year, year after year.  Sure, some years individual properties did better, some years worse, but over time that basic rate tended to hold.  And if there was a market correction which set values back by a year or two’s gain, the market began again at that corrected level, and returned to our baseline rate of annual appreciation.

Any rate of appreciation significantly higher than that was inherently suspect to most well-informed observers, and, in fact, most people had some sense that the recent gains which basically doubled that rate, for year after year, couldn’t be reliable.  A market correction had to be coming.  And yet, many of us (most of us, actually), closed our eyes and pretended it could go on forever.

We’ve all heard and read much about the factors which contributed to the mortgage crises, and ultimately, the largest economic crisis since the great depression.  The reasons, while they need to be clearly understood to avoid such traps in the future, don’t really matter to to the question of what needs to be done now.

Presumably, the Obama administration, as well as the rest of the world, will pull our strengths as a society together to overcome the banking crisis, economic crisis, and even the mortgage crisis which appeared to trigger it all.  The banking crisis has already been largely addressed by the huge infusions of cash into the financial institutions which Secretary Poulsen injected.  The incoming Obama administration is discussing a substantial economic stimulus package to address the economy overall.

However, until the mortgage crisis is directly and comprehensively addressed, property values will continue to fall, as nearly half of all current real estate sales are of foreclosed properties, at sacrificial prices.  This trend needs to be stopped, and stopped soon.

We’ve heard all about “moral hazard,” and the presumed importance of maintaining that and other basic principles as we sort out the impaired mortgages which clog the lenders inventories.  The fact, however, is, there are just too many bad loans, which call out for action right now, to take the time to neatly sort them into baskets according to the borrowers’ relative fault in getting there.  Whether the borrower was at fault or not, each foreclosure in a community is a negative influence on the value of every other piece of property in that community.  For that reason, we just need to fix the problem as expeditiously as possible, and, everywhere it is possible, keep owners in their homes, even if the principal balance of the home must be lowered to make this possible.   That, of course, is the last thing the lender wants to do, so they have been fighting this with all their strength.  Never mind the fact that vacant homes tend to get stripped of their copper, wiring, plumbing and other assets, leaving the lenders much worse off than if they had lowered the principal and kept the owners in the property.

We, as a people, need to recognize that our real estate is not worth what it was a year or two ago.  It doesn’t matter who is at fault, we’ve all lost a significant amount of value, hence, equity.  As a matter of public policy, we have to divide this loss among the parties: the borrower, the lender, and the government, because if it falls just on the borrowers shoulders, prices will continue to fall and everyone will be hurt that much more.  The lenders can’t absorb it all, or they will all fail.  And the government can’t afford to absorb it all, but if divided among these three, we can stabilize property values, keep most people in their homes, and keep the lenders solvent.  Going forward, we will have to face the realities we should have but didn’t in the last decade, i.e., you need ten or twenty percent down to buy real estate, and solid, provable income to support the payments.

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