It almost seems as if underwater homes should drive prices down rather than up but just the opposite seems to be occurring. And by underwater, no I’m not referring to those flooded by the recent rains. Underwater in the real estate business means those that are valued at less than the outstanding mortgage amounts.
So how are those homes driving prices up? Since the owners owe more than they’re able to sell them for, they tend to not put them up for sale. Many are hoping the prices will recover sufficiently to allow them to sell later, hopefully at a profit rather than a loss. To sell a home that is underwater, the owner either has to bring additional cash to the closing or they have to do a short sale. A short sale is one in which the bank agrees to accept less than the amount owed. Since this does damage the homeowners credit, many choose to stay in the home instead. By the way, while a short sale does in fact damage their credit, it’s not nearly as damaging as a foreclosure would be. So to get back to why the underwater homes are driving prices up: by the underwater homeowners not putting their homes on the market, the inventory level of available homes is down. Since the inventory is down but buyers are out looking, the prices naturally tend to rise on the homes that are for sale. It’s simple economics and the law of supply and demand. Anytime the demand exceeds the supply, the prices go up.
The bottom line is, if you’re thinking about selling, this is an excellent time to do it. Buyers are out, interest rates are at all time lows, and prices are rising due to low inventory. If you sell now you still have a chance to move up to a more expensive home while taking advantage of the low rates and still low prices of homes – even though they do seem to be going up finally. I read a report just today that many economists have officially declared this to be the bottom of the housing market. While no one ever knows that for sure, all signs do point to it.
Happy house hunting (or selling)….and let me know if you have any questions or if you’d like me to write about any particular subject.