The Value of Home

Has real estate joined cars and boats as an asset that loses value over time? Some owners seem to think so.

December 1, 2008

Has real estate become a commodity?

At the end of World War II, soldiers returned to their share of the American dream—a home, a family, security, and a better life. Many of these people lived in their homes for decades, formed friendships with their neighbors, and raised their children in one place. They were secure in the knowledge that their homes were repositories of value—value that always went up.

But in a short time, that paradigm has changed. Today, faced with a second year of falling home prices in most markets, some home owners are beginning to think of their homes as commodities—as temporary and replaceable as their leased cars and computer equipment.

In part, this attitude grows out of the absence of substantial equity that many of these "owners" have in their homes. A home purchased three years ago at $500,000 with no money down could now be worth as little as $400,000 in some markets. At an appreciation rate of 3 percent a year, it will take at least 10 years for a home owner to recover such a loss. For these people, even those who could afford to continue making mortgage payments, walking away from such a scenario may seem like a viable option. 

After all, some ask, "Why put good money into a bad business decision?" Even if the foreclosure affects future borrowing abilities, it may still be advantageous from a cashflow standpoint. Has the pride of homeownership gone away—just like the equity in a home?

No Moral Imperative

In the past, there was a social and moral stigma associated with bad debt or foreclosure. But in an era where bankruptcies are common and many people see the lending market as amoral and predatory, walking away from debt may not seem wrong.

If home price declines continue, even those home owners who can afford the costs of owning a home may begin to question whether they should continue to make mortgage payments or how much they should spend to maintain their property. 

These decisions become an issue of return on investment rather than pride of ownership if the assumption that appreciation will cover the cost of maintenance and upgrades is no longer valid. Such attitudes further undermine the idea that a home is the long-term source of wealth accumulation it has historically been and turn it more into a use-it-and-toss-it commodity.

This commoditization problem is compounded by lenders who are pressuring appraisers to ignore the value of upgrades and property condition and instead focus on short-term comps that often reflect the "fire sale," foreclosures priced far below the longer-term values of a neighborhood.

Lenders Hold the Key

Before this problem becomes even more widespread, the real estate and lending communities must inject some sanity into the current situation. No one is advocating a return to unsound lending practices and the bad loans they produced. On the contrary, lenders must continue to make good loans to qualified buyers. 

In turn, buyers must bring an equity stake to the table so that they share in the risks and rewards of homeownership from day one and have the ownership incentive and investment needed to justify ongoing repairs.

Failing to acknowledge borrowers’ attitudes and valid concerns regarding falling real estate prices simply perpetuates the perception that homes no longer hold their value. The solution is to be proactive. 

Real estate practitioners need to encourage lenders to once again make sound loans to sound buyers with a real equity stake in their purchases. By doing so, we can all help to reverse the tide of mortgage foreclosures. Overreacting to the deflation of the real estate market only compounds fears that real estate is just another commodity. 

John Ritchie is a broker with Gables & Gables, REALTORS®, in Knoxville, Tenn. He is also a real estate instructor and the author of several books, including the recently published Leading the Real Estate Transaction. He can be reached at