The Mortgage Guru

I’ve been talking about my predictions that the Seattle area housing market is headed for significant price drops over the next year, averaging about 10% to 20% below the peak home prices of 2006.

We are already seeing this start to happen.

If you are planning to keep your home for many years, that’s not a big problem. Just ride out this housing slump and home prices will eventually bounce back – they always do.

But the question is, how long will that take?

It’s very hard to predict, but I would guess (emphasis on the word “guess”) that we won’t see home prices appreciate again for at least 5-7 years.

In the meantime, home prices are headed down. I expect home prices to drop for the next 12-18 months and then the housing market will flatten out with very little appreciation or depreciation for a few years.

The bottom line is that every month your home is worth less and less. And that’s a big problem if you need to refinance.

Here’s why:

Let’s say you currently owe $300,000 on a $400,000 home. You would have no problem refinancing and pulling cash out because you have $100,000 worth of equity in your home.

But what happens if the value of your home drops 20%?

Your $400,000 house would then be worth only $320,000 and you would have only $20,000 worth of equity in the home. That’s a Loan-To-Value (LTV) ratio of almost 94%, which means you can no longer pull our any cash, and you barely have enough equity to do a “rate and term” refinance to get a lower interest rate if mortgage rates come down.

And what if you owed $350,000 instead of $300,000 at the start of this example? If your home value dropped 20% to $320,000 you would find yourself in the very uncomfortable position of owing more on the home than it’s currently worth!

The point of this post is not to scare you. We just want you to understand the reality of what is actually happening in the housing marketing today and how that affects your mortgage finance options.

One of the top local appraisers that we often use at Best Mortgage told me that about 75% of the homes that he is appraising today have comparable home sales in their neighborhood with decreasing prices. Home values have dropped anywhere from 2% to 12% depending on the area in which he is working. In general, the farther a neighborhood is located away from the major urban job centers, the more its home prices have depreciated.

It’s simple supply and demand. Lots of homes for sale + few buyers = lower home prices.

Here are a couple of real life examples cited by our appraiser:

A house in West Seattle that was purchased for $499,000 on May 23, 2007 appraises now for only $470,000. That’s a price drop of 6% in only six months.

A 3-bedroom condo in Renton that sold for $360,000 on September 29, 2006 appraises now for $335,000. That’s a price drop of almost 7%.

And the sad part is that most people don’t even realize that this is happening. They still have the idea that their home is worth what it was at the peak of the housing market.

At Best Mortgage, we are constantly getting calls from people who tell us that their house is worth “x” dollars, only to find out that it is worth significantly less when we order the appraisal.

And this is just the beginning!

When the weather warms up and a flood of houses come on the market for the traditional Spring home buying season, you will see values drop even more because sellers will be forced to cut their prices due to all the competition for home buyers.

Be prepared to watch a big chunk of your home equity disappear over the next year or so.

Again, this is not a problem if you are planning to stay in your home and you have no need to refinance.

But if you’ve been thinking about refinancing – to lower your interest rate and/or pull cash out of your home for whatever purpose – please do yourself a favor and refinance NOW before your home’s value drops any further.

We hate telling people the bad news that their home is worth less than they think it is, so don’t delay.

Call Best Mortgage today at (425) 746-1310 and we will help you work out your best financing options before your home equity disappears.