Forces Driving the Deflation of Real Estate Prices


Via David Monsour (Prudential Bob Yost – Sites, Gettysburg, PA):

I’ll preface this blog because these ideas are not my original ideas although I do agree with them.  The following while summarized by yours truly is content from the book “Aftershock” by David Wiedemer, Rober Wiedemer, and Cindy Spitzer.  It’s not negativity it’s reality.  Take from it what you will, but at least consider and think about the information I’m about to provide. 

Forces driving the deflation of Real Estate Prices

1.) Rising or declining home prices drive home prices.  We often don’t talk about this point, but it may be one of the strongest factors dictating pricing in our individual market. People want to buy homes when prices are increasing.  Considered the scenario we faced in 2004-06 it didn’t matter what you paid because the following year the house was worth 10-15% more.  Fast forward to 2010.  On a national average home prices are dropping roughly 14% per year.  Purchasing a home has now entered the new car category on the investment scale.  It loses value the minute you drive it off the lot.  plain and simple people like to buy homes when they’re increasing in value.

2.) The Power of Leverage.  Investors use the power of leverage to create wealth.  The abiity to put 5% down and have that 5% cash investment turn into a 100% increase due to increased equity because of the inflation of home prices it’s appealing.  Investing 5% and losing your cash investment in 2-3 months because of deflation of value is not appealing.  People consider their homes a place to live, but also look at the purchase as an investment. 

3.) Collapse and “Death” of innovative mortgage practices.  The days of innovative no doc “liar loans” is gone and will never return.  Alt-A, Option Arms, and introductory rate loans are hard if not impossible to find.  Income is being verified and scrutinized.  While none of us were a fan of these practices the reality of the situation is that they stimulated home values.  Now we are seeing the lending institutions tightening qualifications in addition to the increased mortgage insurance premiums (see previous blog). 

4.) Job Loss and Percieved Job Security.  The current unemployment rate is at 9.6% which we all know is a conservative figure.  I don’t think that figure even accounts for people whom have just thrown the towel in and given up.  More importantly though is percieved job security.  Across the board people wondering if they’ll have a job tomorrow, the next month, or next year.  People without job security are very unlikely to enter into an contract to purchase a home unless they are sure they’ll have a job for years to come.  Obviously people without jobs can’t buy houses so I think that portion of this section is self evident.

5.) Foreclosures.  Pretty self evident if you’re in real estate.  Foreclosures flood the real estate market with unoccupied homes that are for sale.  The more inventory available the less demand their is available.  Falling home equity is a force behind foreclosures.  People have the feeling that they’ll never dig out or that the properties value is too far lost.  We’ve beaten this to death so I’ll stop now.

6.) Higher Down Payments are inevitable. – Private mortgage insurance assumes the risk up to 20% and with the default rates rising two things must happen.  Private mortage insurance must cost more (see last blog) and down payments must increase to balance the risk associated with lending money.  Obviously we have loan products that allow homes to be purchased for 3.5 percent down or 0% down (rural housing) but we are then facing a negative equity situation a month or two after purchase.  If the average deflation of values nationwide is 14% and people are putting 3.5% down we have a serious problem on our hands.  According to the book some FHA loans have defaulted before a single payment takes place. 

7.)  Buyer and Seller Panic.  This is where it gets dicey.  Sellers begin to panic and sell for whatever they’re able to get for their homes.  Locally the tax reassessment is surely creating these sentiments amongst the locals.  Sellers are seeing the enormous amounts of money they are losing on a monthly and yearly basis and decide they better get out before they lose any more money.  Buyers on the other hand find out that a friend bought a house for x that is no worth x -100,000 and lose confidence in buying a home.  The point where waiting until home prices start rising again will make more financial sense than purchasing now and hoping that the bottom of the market is near.  Media and government cheerleading are no longer a strong enough force to continue to will the market into a period of price inflation.

 Photos Courtesy of Darwin Bell


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David E. Monsour, Realtor

Prudential Bob – Yost Sites Homesale, Gettysburg, PA 17325


About susanmorrison

After living in Walpole, MA for many years, our family was transferred to the west coast when I was a senior in high school. In 1983, I graduated from Mission San Jose High School in Fremont, California. I am also a 1987 graduate of Providence College with a major in liberal arts and a minor in business administration. I bring to the table many years of sales experience beginning with thirteen years in Corporate Sales at Delta Air Lines. I'm the mother of three children and I'm very active within the Franklin, MA community. I am also a cancer survivor and support the American Cancer Society Charities.

My husband and I have built five homes and I've lived in a variety of other locations including Toronto Canada, Irving Texas and my current home in Franklin, MA. As a result of all my moving around, I came to the conclusion that I was an expert at moving...why not become an expert on the other side of the table? I earned my real estate license in 2004 and believe that I have found my true niche'. I can empathize with my clients on a variety of levels; whether they are buying or selling. And, like so many other good realtors out there, I believe that possessing good communication skills is one of the many keys to success.

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