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Thursday, January 27, 2011

What does a monthly home price drop mean in real terms?

Often financial statistics are thrown at people and they can be so convoluted or confusing (sometimes intentionally so) that its difficult for most to understand its meaning unless they take the time to really study finance. And quite honestly who really wants to do that unless its a passion of some sort.

So one of the goals of A&G is to take intentionally complicated information and express it as clearly as possible for everyday people to understand and apply to their lives, yet never with the goal or desire of talking down to the reader.

You would be surprised how few financial news sites and blogs make this effort

So, that being said, onto the topic- What does it mean when you hear or read that home prices fell 1% in a given month, like it did this past November, 2010?

Let's use simple math- You own a home valued at $300,000.  Its a fair and realistic value based on comparative appraisal pricing of other homes on your street, bedrooms/baths, etc...

So the following month, home prices drop 1%.. what does that mean?

Simply- you just lost $3,000 in value in a span of 30-31 days

This means that unless a prospective buyer is simply in Love with your home and Must have it, you are not getting $300,000 for it.  You now need to drop your asking price to $297,000.

Now, let's say you hear or read a statistic that says that home values will be dropping at an annualized rate of 5%, which is by the way not a number out of thin air, but is predicted for 2011 due to all the foreclosures expected to hit the market.

What does that mean?

Let's use the $300k home again as our example. --  A 5% annualized loss

The simple way to figure the ultimate decline in home price would be to take the $300k and multiply by 95% (100% - 5% loss) and that would be your home value after 12 months -- $285,000.

If your home was worth $100k in 2010, it will be worth $95k by year's end

And if your home was worth $1mill in 2010, its end-year value will be $950k

No matter what nonsense your elected officials tell you about 'recovery' or positive unemployment numbers, there will be no real recovery until home prices stabilize without government interference. Because as expressed often here, for most Americans, their nest egg is their home and most people are losing their greatest financial asset at an alarming rate.

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