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Michael LaCour-Little

February 11, 2008

By Pamela McLaren

Newspapers have lately been filled with tales of doom and gloom when it comes to the housing market and the fall out over the sub-prime mortgage market. Michael LaCour-Little, professor of finance, recently completed a Real Estate and Land Use Institute report titled “Wipe Out: Realized Losses on Home Sales in Orange County in 2007 Reach $272 Million.”

Q. What were the main findings of your report?
A. I found that many (about one third) of home sales in Orange County during 2007 took place at a loss, that is, the sales price was less than the homeowner paid for the property. This was particularly true for households who purchased near the top of the market, which was probably in early 2006.

The report concludes that about $272 million in housing wealth was wiped out in these sales during the first 10 months of 2007 and that the average loss, for those homeowners who sold at a loss, was a little over $100,000. Unfortunately, I could not determine to what extent these losses were incurred by investors versus homeowners, but recent national reports suggest perhaps as many as one fifth of recent foreclosures were on investor properties, rather than owner-occupied housing. That fraction may be even higher in Orange County.

Q. Should all of us be concerned about this housing slow down?
Yes, there is considerable concern that the housing market downturn may push the economy into recession; hence, policymakers current discussions regarding economic stimulus packages.

But, if you own your home today, can manage your current mortgage debt, and have no immediate need to sell or refinance, there should be relatively little impact. You may feel poorer if your housing wealth declines, of course, but I don't think there's any reason to panic. Despite recurrent media headlines, the sky is not falling for most households.

Q. What are the long-term ramifications to this downturn in the housing market?
The largest immediate impact is probably in new home construction, which has come to a near standstill in many areas. Those working in that area, and related areas such as real estate finance, will be adversely affected, too. However, longer term, these problems should be largely self-correcting as the market adjusts.

Q. Is there a light at the end of the tunnel for those buying or selling their homes?
A. For those who are currently renters (about 40 percent of Orange County households) the news is generally good: prices are down about 10 percent already and may be still lower in the future. Moreover, mortgage rates in the conforming loan market (less than $417,000) for those with good credit are below 6 percent and probably headed lower, too.

If you are a current homeowner, unless you bought at the top of the market with very little equity, things should be ok, though my advice is to hold on, if possible, rather than try to sell now, given current market conditions. The main reason households lose money on their homes is selling at the wrong time. And, in the long run, prospects for housing in an attractive and economically healthy area such as Orange County, are good.


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