Hmm...I don't think that's what the poster in the post I responded to said.
He said that houses went from $40, to $300k then back to a miserly $250k and that this represented depreciation.
No, he didn't. He simply said that prices had gone up from $40k to $300k, then down to $250k. He said it had lost a lot of value ($50k from $300k to $250k), but was still way up. I'm not sure how you turned this into "net depreciation over five years," but it isn't what was written.
What I was talking about was a separate issue, as the original post never talked about the actual situation with housing equity as it applies in the real world, only about the average situation on the market.
This is a multi-layered scenario. We could talk about overall markets from a number of perspectives, as well as the individual financial situations involved in those markets. I'm trying to make it as clear as possible
what I'm referring to, but apparently it isn't quite clear enough.
I don't know where either he or you went to school, but I know that even my miserable public schools math (all the way to the 8th grade!) could be used here to show that if Louisa (being PC) bought a house for $40k and over the course of 5-7 years, it's value increased to $250k today, this would be a net appreciation in value of...lemme see....carry the 14, hyptenize the transect...yeah, um...about $210k in APPRECIATION. Appreciation means: dun be wort' more'n afore!
And out come the barbs!
As I explained in my post,
the owner who bought the house for 40k would in fact come out ahead.
If you'd actually read my post, you would know that. I also explained that you can't simply look at the overall market trends in valuation and think you're getting the whole picture. I don't think I was clear enough about that, so I'll go into more detail.
As an aside to your stupid comment about math: There is much more to mortgage market evaluation than simply doing some basic math with housing prices before and after some arbitrarily chosen points in time. However, I know this is just how you talk to everyone, so I'll just let it go.
While it is wonderful that the market value of the house has increased by a net amount of $210k over five years (assuming no inflation/inflation-adjusted values and all that fun stuff), that's not how equity works, and equity is what matters to the specific owner (which is what I was talking about in my post). To say that the house "appreciated" in some sense since it was originally built, or purchased by first owner, or whatever is essentially meaningless when we're talking about specific people rather than overall markets. I made it quite clear that I was talking about specifics and not market averages, as I used the term "equity," which is a specific term in lending that does not refer to what you just did.
If the current owner owes more than the house is worth, they have no equity in the house. Thus, they have lost money on their original investment, unless the market turns around and they pick up enough equity to reasonably expect to turn a profit if they sold the house.
As I mentioned, they can also leverage the equity in the house to obtain credit, if they want to swing it that way. Either way, the equity in the house is the economic advantage to the specific owner, regardless of the market movement of the housing price.
Now, the overall market appreciation is a nice macro metric for overall economic health (actually, it's kind of a crappy macro metric, but that's beside the point), but it tells us very little about the specific situation on the ground.
Um...no, actually the things you say "matter" don't. The current owner might've paid 40million for their house. What matters is an OBJECTIVE appraisal of then-to-current values. It also does not matter if the current owner (or any others) were ripped off by bad LOs, agents, appraisers or God Himself. What matters is: what was a reasonable market value (key term) for the house then, and what is its reasonable market value (told you to remember that one!) now?
No, that might be useful in terms of determining how the housing market has done on average in a given location, but it is worthless information when it comes to assessing the actual situation with the present owner. Without knowing how much someone owes on a home in addition to how much it's worth, you can't say that they actually have any equity in the house, and therefore you can't say whether or not they've come out ahead in a given market situation.
If that value was $40 k 5 years ago, and if it's a paltry $250 now (tho it may have been higher last month, last year, or in the flippin' 1930s) then it has appreciated since we started looking at its value, 5 yrs ago when it was valued at $40k.
Well, it gets even more complex when you move beyond the specific owner and into the wider market. First off, the mortgage lenders are very sensistive to price and interest rate changes, and a drop of $50k in a year (a 17% drop in value) can be enough to switch them over to a much harder underwriting stance on new loans, if the drop is widespread. That will contract the credit market, regardless of whether or not there was some market appreciation on the houses.
Also, there are mortgage-backed securities that are negatively affected by increases in foreclosures. If you want to evaluate foreclosure risk, you'll have to return to the specifics of the owners' situations, rather than looking only at the overall market appreciation. If most of the current owners are recent buyers with heavily leveraged homes with no equity, then the risk of foreclosure increases dramatically, which impacts the value of the related securities negatively and impacts the extension of credit from the lenders.
And it especially does not matter what the homeowner "expected." I expected to have the long, lustrous locks of my youth in my coffin. Not gonna happen now, judging by the glare I get from my now hairless pate.
What I said was that if the owner buys the home for $300k for the reason that they are expecting the value to rise (
which was an aside not related to the main point), they will experience a net loss because they lose equity in the house. Let's say they paid 10% down (not ideal, but not as heavily leveraged as some mortgages are) and paid an additional $8k towards principle in the year (a reasonable estimate, I think, the remaining mortgage payments would be towards interest). The owner would have:
Assets Liabilities
$250k house value $262k loan balance
So they would have no equity. In fact, if they sold the house for the appraised value (a rare thing indeed), they would owe $16k to pay off the remaining balance on the mortgage.
I never said that expectations influence valuation, and if you think I did you need to read more carefully.
What you are seeing in this example is a typical, marke correction: values went up...then more, then more, on speculation, yes. Then corrected recently to a more reasonable market value as speculators bailed and homeowners were left to deal with reality.
Yes. I never said it wasn't a correction. I have said in numerous threads that I believe the lenders over-extended themselves when issuing credit. What's happening is a natural result of that.
No evil. Just markets. If you are dumb enough to go into real estate as an amateur and engage in specualation of this sort and you get burned you either take it as a lesson and avoid it next time, or get out.
I never said there was "evil" there. I agree that speculation is risky and difficult, but that's beside my various points. I'm talking about the various economic and financial factors, not assigning some moral value to all of it.
