Troubled Homeowners Slashing Prices

Analysts who thinks that the housing market may rebound this summer better think again. Home sales have been slow and now there is evidence that homeowners are having so little success moving their residences that they are cutting asking prices at an alarming rate.

Housing website Trulia.com reports that “the price of nearly one in four U.S. homes for sale on July 1 had been sliced at least once.” The average cut was 10%, but in some cities it was much more.

Detroit, Miami, and Las Vegas are all markets where prices have been chopped by 15%.

The prices of homes in the US is already down an average of more than 20% and in some markets in California, Florida, Michigan, and Nevada that figure is above 40%. Economists have hoped that housing would find a bottom due to price cuts which make buying homes much more affordable. Mortgage rates are also near historic lows.

But, the new numbers show that the housing correction is probably far from over. A market like Detroit could end up with a price correction of more than 50% if past cuts and current cuts on asking prices are taken into account.

The most troubling aspect of the data is that the net worths of millions of people are likely to be more severely damaged than they already have been.  Millions of mortgages are “underwater” with the cost of the home loan worth more than the value of the house. People who own these homes will have to write checks to their banks at the time of sale. That is certainly an incentive for many homeowners to default on their mortgages.

Further drops in real estate values will also rob huge numbers of people of an asset that was essential to their retirement and sense of financial well-being. Consumers who see their homes as financial sink-holes are not likely to do anything more with their money than pay essential bills. They won’t be back in the malls for the holidays.

Trillions of dollars of value have leaked out of the housing market already and it appears that home values will drop by trillions of more dollars over the course of the next year to two.

Douglas A. McIntyre