Some Homeowners Are Still Down Even After a 79% Rally

home-prices-down

Losses hurt. This is true emotionally, financially and mathematically. And some homeowners are learning a painful math lesson even as real estate recovers.

However, there is good news for many homeowners. Home prices, measured with the S&P/Case Shiller U.S. National Home Price Index, are at new all-time highs.

Losses hurt. This is true emotionally, financially and mathematically. And some homeowners are learning a painful math lesson even as real estate recovers.

(Source: Federal Reserve)

After peaking in 2006, the bear market in home prices lasted six years. From top to bottom, the index lost 28%. After a 39% recovery, prices set new all-time highs this year, 11 years after their previous peak.

You probably noticed the difference in size between the loss and recovery in percentage terms. The math explains why losses hurt so much — it always takes a larger percentage gain to recover from a loss. A 20% loss, for example, requires a 25% gain to get back to breakeven.

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This mathematical reality explains why home prices in Las Vegas are still 32% below their all-time high, even after a 79% gain.

Losses hurt. This is true emotionally, financially and mathematically. And some homeowners are learning a painful math lesson even as real estate recovers.

(Source: Federal Reserve)

The S&P/Case-Shiller NV-Las Vegas Home Price Index fell 62% from its 2006 peak. At the low, homeowners who bought the top needed a 162% gain to get back to breakeven. They are moving closer to breakeven, but many are still years away from the home prices of 2006.

This math is true for all markets. Losses also hurt stock market investors. When the next bear market comes — and there will be another bear market one day — investors need to take steps to protect their portfolio.

On average, the stock market declines about 32% in a bear market, according to CNBC. Prices then need to gain about 47% to get back to their old highs. For many investors, being forced to wait for a 47% gain could mean delaying retirement.

Losses like that are why index funds may prove to be dangerous when prices fall again. Selective trading is really the only way to avoid losses in a bear market.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

  • jringo55

    Truth: Banks, aka lenders don’t make any money without taking risks. It’s (always) worth it to them to lend to risky borrowers. The other option is to sit on money and imagine it will grow on it’s own. Trust me, it won’t. Sub prime lending is alive and well. It can be seen at any car dealer in town. As for housing. Sub prime lending just moved up to higher wage levels. You should see all the housing going up in our area. The people are buying 500k to a million dollar homes like they are candy on 30 year notes. What will happen to these homes in the next recession? Will they be able to keep their homes if one of them loses their job? Yes indeed, sub prime lending is alive and well. We are seeing the same repeat of a sub prime bubble about to bust at any time. It looks just like 2008. Case in point. We bought a house a couple years back. With a combined income of less than 80k, we qualified for a 500k home. We opted to spend far less. Yes indeed, sub prime lending is alive and well. It’s a bubble that can pop any day. All that’s required is the next recession. Recessions are not a thing of the past. 9 years of cheap money growth lofted to Corporations, Wall Street and Banks will come home to roost. It’s going to be ugly. You have been warned.