Your Home’s Worth What?

What is your home worth and what can revive the housing market? Recognized housing expert Kevin Gillen, Ph.D., tells me that home prices have declined about 18 percent in Philadelphia since the peak of prices in 2007. The decline in the suburbs has been about 22 to 30 percent.  Gillen says the larger drop in the suburbs is a first. The extra drop has happened mainly because of energy prices. Says Gillen, “The longer the commute and higher your utility costs, then the more in (home) value is lost.” The attraction of Center City,  Philadelphia, and the desire for smaller environmental footprints have also contributed to more price losses in the suburbs.  But, the value of your home may also depend on other factors.  If you are in the suburbs and close to mass transit, you are less affected than those farther from a train. The larger your house, the more you are adversely affected by the cost of heating and cooling.

Dr. Gillen, of Econsult and a member of the Boards of Directors of the Greater Philadelphia Association of Realtors and the Homebuilding Industry Association, says one other interesting fact is that “This year it actually became equivalent in Philadelphia to own versus  to rent a home.” Home prices have come down but rents have actually gone up. Gillen says there is good news for homeowners.  We are near the bottom and we have fallen less than the national average. But, he adds, “There is no one sure fire solution to this housing crisis.” It will take several more years to recover, but it might be only another 5 years compared to 10 years for a lot of other places. The nation still needs to settle on the right level of regulation of the mortgage sector and jobs need to continue their upward rebound.

More than 1 in 5 homeowners in America are underwater. Why should you care about your neighbor who is underwater?  While our region, except the city of Philadelphia, does have fewer foreclosures than the national average, financially speaking, says Gillen, what happens to a neighbor affects you unlike any other investment your neighbor could make. Foreclosures and people who walk away hurt the people who pay. Concern about foreclosures has fueled a new Congressional proposal.  New Jersey U.S. Senator Robert Menendez is chair of the Senate Banking Subcommittee on Housing, Transportation and Community Development.  He tells me, “A very significant universe in the housing population is underwater,” meaning homeowners who owe the banks more than their houses are worth.  It adds up to $700 billion dollars.  Menendez says the recently announced settlement in which banks pledge $25 billion to help some avoid foreclosure is helpful, but just one of several actions needed. The senator wants more reform of government sponsored mortgage holders, Fannie Mae and Freddie Mac, and more refinancing incentives.

Menendez speaks of “pushing the urgency of now.”  His Preserving American Homeownership Act would create pilot programs in which lenders lower mortgage values for some people who are underwater and, in exchange, the lender would get a share of the equity that the home will eventually build.  Kevin Gillen says a similar proposal didn’t work so well in England. One potential problem is whether homeowners stop investing in their homes because they don’t feel they’ll see the gains in equity. Menendez’s plan tries to address that by capping what lenders could reap. He also wants to make available more mortgage counselors. Says Menendez, “Home mortgage counselors for those who are facing a challenge, make all the difference in the world.”  Through several proposals and reforms, the senator says he is looking for “a positive ripple effect.” Gillen says that a real estate transfer tax holiday period in Philadelphia might spur sales locally.

So you want to sell your house? For now, Kevin Gillen says homeowners need to understand that inventories are still 30 to 40 percent above historical norms and prices could drop a little more, as much as 3 to 5 percent more. The pace of sales is still well below normal.  Homebuilder confidence is rising but still not near normal.  Homeowners need to have their homes looking their best, repairs made and get a good realtor.  

For buyers, there is some easing of credit, (loan to value ratios are now about 82 percent, up from the 70’s range), but still buyers need to have good documentation, need to have paid their bills and need to have a good credit score.