Why lower home prices are good
Lower home prices have depressed the spirits of many people, including politicians and economists. In their minds, we can't sing “Happy days are here again” until we reinflate the housing bubble. When U.S. home prices peaked in 2006, their apparent value was falsely inflated by “a historic anomaly based on easy credit caused in part by misguided government policy.” While some benefited from that bubble, its net effect—like all bubbles—is negative. The most economically healthy housing market is when home prices accurately reflect home values, and when the supply of homes does not significantly exceed the demand. Slumping real estate prices resulted from too easy credit fueling a building frenzy that produced a massive glut of homes that will persist until prices fall enough to stimulate sales, or the economy rebounds substantially—but don't hold your breath waiting for that.
Low home prices are not good for banks stuck with devalued foreclosed real estate, or for banks in general, since they stand to make more money from larger loans necessitated by higher prices.
Low home prices are not good for homeowners (or others with real estate) hoping to sell if they are underwater: that is, their remaining mortgage balance exceeds the free-market value of the property. However, if they have enough income or liquid assets to pay off the mortgage, lower prices can be good for them, too, if they subsequently purchase a comparable property that is now more affordable after the real estate bubble burst.
Low home prices are good for almost everyone else. If you want to buy or rent, lower prices are a godsend. Therefore, “state and federal policies which prop up housing prices are discouraging the market from taking the steps necessary to get back on track” and therefore delaying recovery, and therefore delaying the time when rising prices signal a genuine increase in real estate values as opposed to the bubble-inspired fantasy values that deluded many people into thinking they were richer than they truly were.
Low prices are generally good because they enable people to purchase more products and services that are often made more affordable by enhanced efficiency in producing them. People usually celebrate lower prices of food, medicine, healthcare, energy, automobiles, clothing, entertainment, recreation, and everything else they buy except real estate. If they held real estate, owning an appreciating asset enabled them to potentially profit from its sale even though that profit was largely dissipated or entirely lost by subsequently buying other property with an inflated price, and by paying higher real estate commissions, real estate transfer taxes, property taxes, property insurance, and title insurance.
Mathematically challenged individuals are most likely to not realize how much money they can lose even from selling real estate for more than its purchase price. I could correctly answer every exam question in college math courses and even all of the tough bonus questions, but when it came to real estate, I was just another dunce who was easy pickings for the real estate
racket, um, industry that profited immensely by letting buyers believe their fantasy about making money.
For example, I owned my first home for three years before selling it for $40,000 more than I paid. But did I make a profit? Hardly! After subtracting the real estate commission, I lost $5000. After subtracting the money I put into home improvements and maintenance, I lost another $20,000. After subtracting the utilities and insurance, I lost well over $15,000 more. After subtracting the money I lost paying interest on the loan and property taxes, I lost another $150,000. Add them up, and for the privilege of living in that home, I paid $190,000 in just three years. That's over $63,000 per year, or about $5277 per month. Factoring in interim inflation, I lost $285,000, or almost $8000 per month. Add in the loan origination fees, points, closing costs, appraisal fees, inspection fees, private mortgage insurance, capital gains taxes, miscellaneous other fees, moving expenses, and I lost even more. To properly assess the true total loss, one must also factor in the lost opportunity cost, considering what I could have done with the money (e.g., invest it in my inventions) had I not flushed it down the real estate drain.
That's a lot of money, even for a doctor. The worst part was that I rarely enjoyed the home; instead, I felt like a slave to it. To afford it, I had to work more than I wanted. I spent much of my free time keeping it clean and trying to recuperate from the exhaustion of working odd shifts in the ER. This economic epiphany inspired me to write a free book, Microhome Living.
I bought low, sold high, and still lost a small fortune, yet I made out like a bandit compared with the people who bought my home, who were stuck with even higher monthly payments, taxes, property insurance, title insurance, and utilities, yet now own a home that is worth less than half what they paid for it. Ouch! That is very bad news for them, but if they could sell (or just walk away from their mortgage), the good news is that they could buy a comparable home for less than half what they paid for that one. That means significantly lower monthly payments, taxes, and insurance.
The morality of walking away from your mortgage
A scholar of behavioral economics and the law said, “Wall Street gets to maximize profits and minimize losses irrespective of concerns about morality, while Main Street is told to keep their promises.”
What would happen if home prices really fell?
If home prices fell precipitously (say, the average home cost $5000), almost everyone could live where they wanted: perhaps closer to work, perhaps in an area of breathtaking natural beauty, or perhaps in a warmer region during the winter. Taxes, insurance, and the myriad other expenses of home ownership would magnify the savings so most people could work much less without compromising their lifestyles.
How about living in this home? :-)
Realistically, home prices will likely always be so high they will remain the major stumbling block that stands between people and their desire to live good lives without working like slaves. Is there a way to avoid this impediment that doesn't require pixie dust or winning the lottery?
Yes. As I proved in Microhome Living, even in good times, the economics of traditional home ownership are such that buying a home is equivalent to putting a chain around your ankle and dooming yourself to spend much more of your life working than having fun. In our eagerness to acquire stuff, we often sentence ourselves to lives in which we have little free time to enjoy those things, not to mention what is even more important: our friends and families.
Every great crisis is potentially a great opportunity to rethink if we're on the right track, but too many folks are too eager to have everything return to the way it was a few years ago. My advice is to read my Microhome Living book, then put your feet up and really think about the lifestyle that would make you happiest.
Selling a microhome that you built is almost guaranteed to reap a true profit (not an illusory one), so for the millions of people out of work, wondering what to do, I suggest thinking outside the box. Owning a microhome triggers savings that snowball, yielding surprising benefits.
You can work your fingers to the bone as most people do, but will that truly make you happy? I live near an upscale yuppie town filled with lots of stuff and many homes that make McMansions seem shabby, yet when I go to town, I rarely see people smiling or looking happy and content, nor did I see any more joy before the bubble burst.
I discovered various ways to naturally boost happiness. Coupled with my microhome living concept, people could have more fun than they ever imagined. Why not break free from the lifestyle inertia set down by prior generations that set out a path that leads few people to where they want to go? Why not instead think for yourself?