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Jun 16

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Homeowners wonder how long they can hold their breath

18 minutes 32.59 seconds is the world record for “longest time breath held voluntarily”, according to Guinness World Records. Swimmers and big wave surfers are particularly adept at holding their breath for lengthy spells since doing so yields advantage and survival in their respective sports. Homeowners can now be added to the list of fearless breath-holders. 23% of the home-owning population is under water, meaning the amount owed on their mortgage exceeds their homes value, according to CoreLogic. With a dismal economic recovery and possible double dip recession at bay, some new breath-holding records are bound to be set. At least by the survivors.

The S&P Case-Shiller Home Price Index has become a monthly dose of depression. According to the index, home prices nationwide peaked in April 2006 and then leveled off for about eighteen months before suffering a 30% decline. The free-fall stabilized briefly early in 2010, the temporary effects of the federal government’s subsidy to first-time home buyers. But subsequent failure to turn stabilization into gains has home owners and prospective buyers wondering if the initial correction was merely part one, with further declines to come. Most recently, headlines declare that housing’s recent decline exceeds that of the Great Depression.

That record decline is in excess of 30%. It’s a rather large drop for an asset class which, during boom years, real estate agents swore could not drop in value (how many times did you hear, “at worst, prices are just going to level out”?). So how long will an underwater home owner have to hold her breath before she breaks even? If you bought at the top of the market, around spring 2006, and assuming we’re now at the bottom of the market (an optimistic assumption), plan well over ten years if growth in housing prices matches historical inflation rates of 3%. That’s a long time to be holding your breath. Keep in mind that this “break even” point is deceptive since it will be measured with the value of dollars around 2020 or 2025, not 2006.

Faced with such a dismal outlook, many former home owners have either voluntarily or involuntarily decided to stop holding their breath. This is generally a bad idea for surfers and swimmers, but it might be the best move for some home owners. Home owners have to assess the cost of walking away (effectively, destroyed credit for several years and, possibly, a hurt reputation generally) against the cost of continuing to make payments on their home. As more and more home owners make the decision to walk, banks and taxpayer who bail out those banks take the brunt of their decision to default. In addition, as their abandoned homes flood the market and are sold at distressed prices, housing prices suffer further.

About the author

Eric Madsen

Mr. Madsen is a Chartered Financial Analyst (CFA) charterholder and a Manager at Fulcrum Inquiry, a finance and economics consulting firm that performs economic damages analysis involving commercial litigation, financial investigations, business valuations, and forensic accounting. He also holds an MBA from the UCLA Anderson School of Management and a B.S. in Economics. He conducts expert analysis in finance and economics. Mr. Madsen may be contacted at 213.787.4122 or at emadsen@fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2011/06/homeowners-wonder-how-long-they-can-hold-their-breath/

1 comment

  1. Replicaonline

    Thank you for another great article. Where else could anyone get that kind of information in such a perfect way of writing? I have a presentation next week, and I am on the look for such information.

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