Estimating Future Home Values

A couple of years ago people all over the U.S. were betting that their homes would continue to rise in value year after year and it seemed like a safe bet at the time. Although some worry-wart analysts were predicting that home values would drop like a tranquilized elephant, most people pooh-poohed the naysayers and continued to buy properties and flip them or get cash out refinances, not overly worried that prices would drop. Home owners got into very risky types of mortgages like negative amortization Pay Option ARMs (adjustable rate mortgages) or 5 year, interest only loans that eventually became ARMS.

Although many of these same borrowers found themselves in dire straits once the economy went sour, home values will still rise in the long run. Looking at today’s market however, we see lots of REOs, foreclosures, and short sales that have driven home values down considerably. How long this will last is not predictable until the economy shows stronger signs of recovery, which so far it has not.

Job losses continue to drive the poor market and tight lending by banks and other lending institutions have all but made it impossible to borrow money unless you have a lot of equity, a huge down payment, and a great FICO score. If your credit score is below 720, the lenders consider you to be a sub-prime risk and right now there is little to no subprime lending.

The reason that there is no subprime lending is basically because there is no secondary market for lenders to sell their loans to except for Fannie Mae. Since Fannie Mae’s guidelines are so strict, very few borrowers these days can qualify for a new home purchase loan or a refinance. Refinances can occur and many homeowners may want them because interest rates are so low and attractive, but because home values have dropped so precipitously in the last couple of years, very few have the equity necessary to refinance.

Many people who were in bad loans have since been foreclosed upon or have simply walked away from their properties, unable to make the payments any longer. The wholesale loss of jobs nationwide has created hundreds of thousands of unemployed or underemployed people who just do not have the money to make ends meet anymore. Credit scores have gone down in a big way but we may never know how much exactly since these figures are not published, as they should be.