Ransome

Property Values Set to Fall 43% from Current Depressed Levels

I am not so sure we haven't hit the bottom. I bought a house for 165k in 1987. In 1997, my neighbor in real estate said it was worth 140k. I am one that refuses to take a loss. Back in the '80's mortgage interest rates were up at 8 or 9%. It depressed the market. When banks started giving money away my house increased in value overnight by about 50% based on a monthly payment without any loan gimmicks. The drop in value over 10 years created a latent demand that was overstimulated by cheap money. Over the entire period from '87, replacement value increased.

We went from a depressed market to an overstimulated market to a restrained market. Taking into account the cost of money and the latent demand, prices seem about right Location still exerts a positive pull on value. The '87 house is on a cul de sac where kids can play in the street and the houses have big lots in a good school district. It has twice the value to a young family than a town house, which sells for 170k. If I increase the value of the house with no appreciation, based on money cost and latent demand it is about 280k (50% + 20%) . Adjust for real inflation at 2% per year (50% + 20% + 40%) * 165K = 345k. The real price is between 280k and 345k which is in the range predicted by the town house price.

I also heard that Dodd may propose opening up the 8k bonus to all comers to help move inventory. The timing would be especially good for local banks who are deposit rich but cautious as they lose more money on development and new construction loans. This could open lending for them, generating badly needed revenue and establish the housing value floor if money is lent prudently. It may unfreeze the ABS market with asset values stabilizing at a low point and lending being prudent. Now we need jobs to support all this.