Homeowners, especially those in Arizona, California and Florida, have seen a significant decline in the value of their homes during the past two years. But the plite of most of these homeowners is not as bad as it might appear at first glance. Based on analysis of real estate appreciation over the past two and half decades, any government plan that would subsidize a homeowner’s mortgage payment or require a principal reduction based on the declining value of the home securing the mortgage would be inappropriate and would, in fact, enable some homeowners to receive a windfall from the current economic situation.

This conclusion is based on an analysis of the historical data for the median home sales price in the San Diego metroplitan area for each year from 1982 through 2008.

The blue line in the graph shows the actual median sales price each year during the period from 1997 through 2008.

The purple and green lines show what those prices would have been based on historical trends during the preceding twenty five years. (Click here to see the methodology used for establishing the purple and green trend lines.)

As the graph indicates, actual home prices have been markedly higher than the trends established from the previous two and half decades.  Although there may be other factors that could minimally affect these values, it is obvious from the graph that the increases in actual price during the period shown in the graph were following an unsustainable trend.

Some would argue that real estate agents, appraisers and lenders contributed to the bubble by failing to advise clients of the precarious nature of the market and the risk associated with buying homes at prices that so significantly exceeded the predicted values based on historical trend.

However, a foreclosure mitigation program that provides assistance to homeowners because of the declining vlaue of their homes could actually be providing those homeowners with a windfall.  Bear in mind that the vast majority of purchasers that bought homes at inflated values during the past six or seven years, more than likely had reaped the benefit of an inflated sales price on the sale of a previous home.

Consider the following example that utilizes actual data relating to home sales during the indicated period:

Mr. Oglethorpe bought a home for $185,210 in 1997.  Six years later (in 2003) he sells that home for $424,880. Utilizing our historical trend data the realistic value of that home should have been $258,294. In other words, the Mr. Oglethorpe reaped a windfall from the inflated prices of about $166,586 when he sold his prior home. He then bought another home across town closer to his new employer. He paid $424,880 for that new home (the same price at which he sold his existing home). That home is valued at more than $600,000 just three years later. But then the bubble bursts and in January of 2009 the property appraises for only $305,000.  Thus the current value is $119,880 less than the what he paid for it.  Poor Mr. Oglethorpe. He needs government assistance, right?

Taking a closer look we see that his net appreciation on both transaction was a positive $46,706. That means that in the 11 year period that he owned both properties his average annual increase in value was $4,246. When he purchased the original home he invested $18,510 (a downpayment of 10%).  Having turned his original $18,510 investment into a net gain of $46,706 over an eleven year period, he yielded a healthy Now,house). Thus, his net improvement in value of $4,670 per year actually represents an effective yield over the elven year period of 22.93% per year. Not a bad rate of return for a guy complaining that he’s taken a bath.

Of course, if Mr. Oglethorpe invested the proceeds from the original sale in the stock market rather than a CD or money market, his actual position may still look pretty grim.  But are we to also give Mr. Oglethorpe a handout because he made some bad stock purchases?

The bottom line is that Mr. Oglethorpe takes on a certain degree of responsibility and risk when he purchases an asset, whether it be real estate or stock. It’s convenient to blame the lender, the appraiser, the real estate agent, or the stock broker. But, in the final analysis, Mr. Oglethorpe must bear the bulk of the blame, either for taking the risk associated with the purchase or for choosing the professionals that advised him in those transactions.

My name’s Ken, and that’s my take on it.