Home values could take decades to recover

If you bought near the top of the housing bubble between 2005 and 2006, you could wait decades for the prices to reach that level again, according to a report in USA Today. People who must move for a new job or family crisis find they either have to come up with cash for closing (if they find a willing buyer) or they must walk away from the loan and give the house back to the bank either through foreclosure or through a deed-in-lieu of foreclosure.

The housing bubble that started to inflate in 2002 and burst in 2007 drove housing prices way out of the normal range. The normal ranges for housing prices track these measures:

* Income - The house price should not exceed three times your average household income, which was true from 1950 to 2000. In 2006 the average household income was $66,600, so the average home price should have been about $200,000. But during that year the average home price was about $300,000.

* Rent - Traditionally homes sold for about 20 times what it would cost to rent the home. In 2006 that number jumped to 32 times. Until prices fall back to the 20 times number we won't see stabilization of home prices.

* Appreciation - Between 1950 and 2000, the normal increase in home value was less than 0,5% per year after adjusting for inflation. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked at a 12.3% jump in 2005. Housing prices began to fall in 2006.Unfortunately for those who bought near the peak of the bubble, they may never recover their loss. Bubbles drive prices to a point that cannot be matched. This bubble was inflated by easy money terms for mortgages through optional payment mortgages (where people could pay even less than the interest owed and continue to add to the principal of the loan), no verification of income (these liar loans allowed many to qualify for a home even though they couldn't truly afford it), and tiny down payments (in 2007 downpayments of 0% were allowed through some of the riskier loan options on the market).

Once the bubble burst those shaky loans started to collapse, which began the flood of foreclosures. This scenario should not have been a surprise to anyone. It's exactly what happened before the Great Depression. While the type of loans were a different structure, shaky loans with low down payments that encouraged people to buy what they could not afford drove the prices up then too.

The New Deal came to the rescue. The government took control of millions of loans and restructured them. That plan isn't much different than options being considered today. Without a rescue, foreclosures will mount driving house prices down further and pushing even more people into underwater mortgages that they end up walking away from. Just last week, Credit Suisse predicted that by 2012 16% of U.S. homes would be in foreclosure - that's about 8 million. Hopefully the government will prevent this downward spiral that is now threatening folks who put down 20% or more using fixed rate loans and are stilling getting caught up in this perfect storm.

Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Improving Your Credit Score" and "The 250 Questions You Should Ask to Avoid Foreclosure."
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