• Log in

Thicken My Wallet

Everything to do with thickening your wallet

• Home

Are you as house poor as you think?

Posted by admin on August 12, 2009 in Real Estate

The state of Florida was one of the epicenters of the real estate bubble and crash. Valuation of real estate increased exponentially and burst painfully from approximately 2007 onward.  As an example, it has been estimated that an astounding 47% of single family mortgages in Palm Beach, Broward and Miami-Dad counties are underwater (i.e. the mortgage is now worth more than the appraised value of the home).

But if you bought before the height of the real estate boom in 2005 and 2006, are you that bad off despite being in the middle of one of the largest real estate corrections?

Research by a University of Florida professor indicates that, in the Orlando area at least, those who bought real estate before the boom would own a home now that is  valued as if the boom and bust never occurred (link courtesy of a good find by Business Week). An average Orlando home today, based on a historical growth rate of 4.7% per year, is valued at what it should be and the run-up in prices and crash put the average home prices back where they should be. In other words, it has been a wild ride but real estate is back where it should be (which actually is a good thing; the world is returning to normal slowly and painfully).

Obviously, this is little comfort for those who bought homes during the boom and received mortgages based on boom time valuations (and real estate valuation is more art than science). But for those who bought before the boom, and assuming they did not refinance their homes based on the inflated valuations, the short-interval of joy when high home values made people paper rich and the grief suffered as housing values dropped should be tempered by the fact your home value could be right where it should be historically speaking.

If you want a quick and dirty way to see whether your home value is where it should be, a quick search of the internet should reveal historical growth rates of real estate in your area. Take the historical growth rate for a 20 year period before 2004-2005 and use that as a sufficient sample size for the growth rate. Take the year you bought your home and apply the historical growth rate per year from the year of purchase to today. If you can’t find a historical growth rate, 6.4% annual growth is the American real estate growth rate for the last 40 years according to the National Realtors Association.