Your House Value is Crashing

You probably haven’t thought about it if you are lucky enough to own your home. Prices for homes in your area have not dropped, so what could be the problem?

Let’s say you own your home and have no mortgage. You paid it off thanks to hard work, savings, and the 2% mortgage you had until you paid it off most recently.

Homes sold around you for $800,000, but nothing has sold recently. Everything seems to be on hold.

If you have a mortgage of $500,000 locked in, you also likely think you are doing ok. You can afford your payments and have another two years on that juicy 3.5% mortgage.

But the value of your home is being destroyed. Price has nothing to do with value, as often those two concepts aren’t equal. It's why sometimes things sell for less than they should and often, lately, with homes much more than they should.

It costs you some $25,000 a year to maintain your home without paying any mortgage payments. That includes taxes, utilities, insurance, and general maintenance. With a mortgage of $500,000, add another $25,000 at a minimum, or a total of $50,000 a year to live in your home. Just over $4,000 a month.

That is after-tax income. So, you must earn $66,000 or more to pay for a roof over your head.

The value of your home is what it is worth. The price is what someone is willing to pay for that value.

Not many people want to pay the price being asked for a home, and sellers aren’t willing to lower their prices.

But wait a minute, we forgot about another calculation that goes into value. The lost opportunity of that $300,000 above the $500,000 mortgage equalling your $800,000. You are losing an extra $21,000 per year by living in that home. This is regardless of whether your house is paid off or not.

This means it costs you $71,000 to live in your home with a mortgage or $81,000 yearly if you have no mortgage. (calculating a 7% return over time on the lost opportunity).

As a buyer, I realized I would be paying about $6,000 monthly to buy your home. It is not an investment; your residence never is. I would use after-tax income, so I would need over $98,000 in earnings to cover that cost. I’m not doing that.

The value of your home to me is more in the $350,000 to $400,000 range. If you are asking for a higher price, I would just rent and invest the money I would use for a down payment. The actual value of your home has crashed to about half of what you and your agent think it’s worth.

The significant threat to home values and, eventually, prices is not interest rates, supply or most things mentioned today. The biggest threat to home value is an educated consumer. Calculating the lost opportunity cost MUST be included in any value calculation. A personal home is NOT an investment but an expense. It’s costing you more than you think, as the value is crashing. 

When prices catch up to value, things start to make sense again. Right now, that’s very far away.

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