5 Reasons Why Your Home Will Be Worth Less in 3 Years

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Home pricesReal estate bulls are relishing this week's fresh housing data.

The S&P Case-Shiller Home Price Index -- a widely tracked metric that measures what homes are selling for -- showed a 3.6% sequential uptick during the second quarter.

This is a positive, but don't go popping champagne corks or tossing confetti just yet. We need to frame this upbeat nugget of news appropriately. This is a quarter-over-quarter metric, not a year-over-year one. Home prices are still down 5.9% over the past year through the end of June. Plus, the second quarter's climb also wasn't enough to offset the first quarter's decline.

In other words, home prices still fell during the first half of the year.

Don't Bank on a Rebound -- Yet

Apologies for being a downer, but when it comes to real estate, it doesn't pay to be a Pollyanna. And a handful of signs indicate that the residential real estate market hasn't bottomed out yet.

1. Some pros still see lower prices

Housing analysts -- in other words, brainy specialists who know a lot more about this than I do -- aren't very optimistic.

McCabe Research & Consulting CEO Jack McCabe believes the housing market won't bottom out until foreclosures and short sales are less than 10% of the industry sales and the unemployment rate falls below 6%. He doesn't see that scenario happening until 2013 at the earliest, he told The Miami Herald this week.

Stifel Nicolaus analyst Michael Widner told TheStreet.com last week that his firm sees national home prices falling 15% more.

Earlier this year, Robert Shiller -- the worrywart Yale economist who has been more right than wrong in his Chicken Little housing prognostications in recent years -- felt that home prices could drop 10% to 25% more before landing. He should know: he's the Shiller behind the Case-Shiller index.

2. Fresher data shows a stale economy

The rosy S&P/Case-Shiller Home Price Index gauge covers the three months ending in June.


Do you want a painful refresher on what has happened since then? The stock market tanked. S&P downgraded the country's credit rating. Faith in the U.S. government is rattling on the left and the right. Unemployment rates continue to clock in stubbornly high, and it's not going to get any better with Cisco (CSCO), Research In Motion (RIMM), and Bank of America (BAC) revealing thousands of layoffs apiece this quarter.

The end result is that the S&P/Case Shiller news wasn't the only piece of economic data that the market is munching on this week. The Conference Board is reporting that consumer confidence hit a two-year low. This is a dipstick measuring the country's sentiment for the month of August, a more current pulse of the economy than what housing prices did on the other end of this bruising summer season.

3. Mortgage rates won't stay this low forever

The average 30-year mortgage clocked in at 4.41% last week, according to rate tracker Bankrate.com. It's the lowest interest rate Bankrate has reported since it began aggregating mortgage information 26 years ago.

How long do you think this will last?

Home prices are obviously swayed by prevailing rates. If banks inch mortgage terms higher, prospective homebuyers get less bang for their borrowed buck. Buyers will need to lower their targeted price ranges -- and so will sellers.

4. There is still a glut of housing inventory on the market

The Commerce Department reported that new housing starts dipped 1.5% in July. Building permits, an accurate measuring stick for future construction, fell 3.2%.

Dig deeper into the data and you'll find that single-family homes actually fell by a problematic 5%, partly bailed out by a 6% increase in apartment building.

The disparity is telling. For starters, it indicates that consumer demand for ownership is waning. Too many condo flippers and realty speculators got burned by buying too many vacant houses that are now worth less than their underlying mortgages. Renting is the easy way to go these days, especially given that real estate has been a depreciating asset in recent years. Folks also can't afford new and existing single-family homes at today's prices. Banks need meatier down payments that many just can't afford.

5. Location, location, relocation

Another likely explanation for the uptick in renting over home ownership is the urbanization trend that's driving up demand for metropolitan digs.

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The American dream is no longer a sprawling house in the suburbs with a white picket fence. Young adults are flocking to revitalized downtown areas where there's stuff to do and the mass transit infrastructure to make it all accessible without the hassles of housing multiple cars, maintaining a lawn, and suffering through draining workday commutes.

Census data shows that we're marrying later and having fewer kids. Did you really need that fifth bedroom?

The arms race is over. The Joneses lost -- but so did you.

There's no need to panic. We have likely seen the worst of the freefall in real estate prices. However, if you're banking on a rebound over the next few years, you haven't been paying attention.

Home is where the hard is.

Longtime Motley Fool contributor Rick Munarriz does not owns shares in any of the stocks in this article. The Motley Fool owns shares of Research In Motion and Bank of America. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems.


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56 Comments

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adelston2

yes, the government has failed to protect citizens....i don't think we need all of these senators and govenors on the payroll....it's just not cost effective anymore....1 senator and 1 govenor per state would be fine...we could just eliminate these job positions altogether and save a ton of money and problems....we don't even need a vice president.....one of the senators could step in if the president dies........there is just too much dead wood on the payroll....the govt need to streamline itself like busines does....make 1 senator do the job of many senators and remove his term and tenure benefits...if he doesn't produce then fire him and hire someone else....we don't need elections anymore......the voting machines are rigged anyway....we just need to learn how to hire and fire.these politicians get paid way more than what they are worth....and they have become insane with this economic crisis anyway.....they need to leave washington.retire, go write a book, whatever...just go........just get out of washington, get out of my country.

September 05 2011 at 12:48 PM Report abuse rate up rate down Reply
cb427chevy

with Dems giving everything to the poor and illegals and the Reps giving everything to the rich and big Corps the middle class is DOOMED. With no middle class to buy homes prices will drop if you bought your house after 1990 you will take a hit as prices will drop to 1985 levels. thing to do borrow all you can at low rates stash under bed and when houses hit rock bottem stop paying your mortgage til they fourclose. Then take money from under bed and buy something smaller with cash.Polititians are doing to AMERICA what the TERRORISTS could not MAY THEY ALL NEVER REST IN HELL

September 05 2011 at 11:21 AM Report abuse rate up rate down Reply
erictyson39

If your main goal is to save on interest expenses, figure out how long it will take for your new interest savings to pay off the property appraisal, title insurance and other costs before you refinance. Check out the "123 Refinance" free refi calculator.

September 03 2011 at 5:09 AM Report abuse rate up rate down Reply
man4trth

America/ Americans have lived beyond our means on borrowed money. We have pretended to be rich, now all we have that can’t be sold and transported out of our country will fall in value. It's kind of like an international repo man is here for our stuff, and this isn’t going to end anytime soon.

September 02 2011 at 2:49 PM Report abuse +2 rate up rate down Reply
1 reply to man4trth's comment
stbrack

So true it’s also called deleveraging. This slid will keep on going until we get real with our budget and employment problems.

September 02 2011 at 3:02 PM Report abuse +1 rate up rate down Reply
Rich

Just keep blasting out the bad news just like Schiller...how about what we are seeing on the west coast of Florida. Inventories are down to the 6 month of supply range... down from 24 months supply in 2008...cash buyers everywhere including higher end properties. Could it be that true investors...not speculators...are seeing the value of real estate as opposed to the stock market? But just keep telling everyone there home will be worth less in the future...and keep telling them day after day week after week ad nauseum and it will become a self-fulfilling prophesy.

September 02 2011 at 1:48 PM Report abuse -1 rate up rate down Reply
donut999

Author did miss one signifant reason/factor. In fact, likely the biggest reason and a big part of the logic Shiller subscribes to. It is simply as the distressed properties sell, they bring down values nearby and even area wide. If this time last year you figured the sale of your house would net $200,000 and your debt was $200,000, then you were floating. Today, you are probably $10,000 or more underwater. This time next year, you will be $20,000 underwater. This example was probably not in a position to be a buyer to begin with, now it is next to impossible. Apppraisers can no longer ignore distressed sales which results in potential buyers not being able to obtain mortgage because few of them have much money, and hardly any of them have adequate funds to put down to overcome the appraisal shortfall. And everyday when the sun comes up it gets worse. Ugly whirlpool.

September 02 2011 at 1:06 PM Report abuse rate up rate down Reply
caredlands

Lets face facts -- prices of houses are still too much -- overpriced -- they still need to decline

September 02 2011 at 12:35 PM Report abuse rate up rate down Reply
donut999

Sure not a secret, but seems few realize what little good news coming out of the real estate stats is just a small pool of people with liquidity finally making a move. Common example would be someone who bought a home in 2003 for $250,000, put 20% down and mortgaged $200,000. Late 2006, they could have sold the home easily for $475,000. They did not sell, and the other thing they did not do was pull all the equity out as prices balloned. Today the market price on their home is $300,000 and they decide to suck up the paper loss and finally sell. Their mortgage payoff is $180,000 leaving them with $120,000 down payment on $550-600,000 home which was worth $900,000 4 years earlier and obtain a 3.875% 30 year loan, or they might opt for 3.625% on a 15 year mortgage. This is wonderful for the overall stats but distorts them. There just are not that many people in this position.

September 02 2011 at 11:53 AM Report abuse rate up rate down Reply
1 reply to donut999's comment
warrenbent

Actually, a fairly sizable segment of home owners have been in their homes long enough to be n a similar position.

September 02 2011 at 1:27 PM Report abuse rate up rate down Reply
Romeo Clayton

There is probably a lot of truth to this speculation. However, people have to live somewhere. So as long as they have a job, and intend to stay in their homes for quite sometime, they are not directly affected by their home's declining values.

Romeo Clayton
www.howwepreventwealth.com

September 02 2011 at 11:21 AM Report abuse rate up rate down Reply
SPQR

Housing is not that much cheaper. In many areas prices have not gone down and don't expect them to. People who bought are not going to sell unless they have to. They will stay in their home until they can get at least what they paid for it. We would all have to lose our jobs! or use up all our savings which everyone is trying to take from us! The government will be after us. In Illinois they are going to try and take every cent we have !!!

September 02 2011 at 10:43 AM Report abuse rate up rate down Reply