Issue link: https://newsleader.uberflip.com/i/146256
Sarasota News Leader July 26, 2013 OPINION Page 71 THE YIN AND YANG OF REAL ESTATE — SARASOTA STYLE By Rodger Skidmore Contributing Writer COMMENTARY Every day one reads that prices on homes are reaching a new high in Sarasota, and each day we read that this is bad. Are both parts of this sentence true? And if not, what might be the truth? Some underlying facts: • The bursting of the real estate bubble a few years back knocked down the prices of homes throughout the country, with Sarasota being one of the epicenters. How did we know that the bubble had burst? Prices for existing homes stopped going up. People who bought homes for $400,000, with the expectation that they would be able to sell them for $450,000 a month later, found no one was making them offers at those prices. Subsequently, of course, they were not even offered the amount they had originally paid. Once prices stopped rising, the bottom literally dropped out of the market. • The drop in prices also meant that the values of the homes in which banks and firms had invested had fallen. A bank or investment firm's portfolio (the homes in which it had invested) that had been worth $400 million was now worth, for example, only $200 million. When the portfolio is worth less than the total value of the loans made to the homeowners, it is said to be underfunded. At this point in the analysis, it seems the banks and the homeowners are in the same boat (the yin and the yang): Each has lost 50 percent of his investment. If the homeowner continues to make payments and does not try to sell the house, there is no problem (other than psychological). However, a problem arises if the owner must move and is offered less than the amount he/ she needs to pay off the outstanding mortgage. If the homeowner must leave the house and cannot sell it at a high enough price to cover the debt, it makes economic sense to stop paying money that he/she will not be able to recover and to just leave. If the homeowners do so, they are abandoning their homes; they are in default and the bank forecloses on them. • This drop in prices meant that an individual homeowner who thought he/she owned a house valued at $400,000 now owned a house valued at, for example, $200,000. When a homeowner owes more money than the house A different problem also arose when the bubis worth, the house is said to be underwater. ble first burst. People seeing that they no lon-