Home owner makes a future's bet that prices will fall.

ImageSourcehttp://employerblog.recruitingnevada.com “Ah, yes! Something new has been added!” An old gag line from Loony Tunes cartoons popped into my head the other day while talking to a homeowner. His story, which I explain below, was unique to me thus far, but perhaps will be a sort heard more frequently if his logic catches on. If so, “something new” will have been added to the sea of homes currently washing ashore on our inventory beaches. The individual last year intended to sell his current home, in order to move his growing family into a larger one. However, when his home failed to draw any buyers at the price he sought, he instead refinanced his home, in order to take advantage of the historically low rates. Not surprisingly, in the refinance process, his home was appraised at roughly 20% below the listing price he'd tried to get. He barely had enough equity to refinance, but the loan got done. His family, he reasoned at the time, could live in the smaller home a bit longer while waiting for the real estate market to stabilize. If he sold his home in the current market, a market he felt was pulled down due to foreclosures and short sales, he would not be getting a fair price. After all, he reasoned, homeowners like himself, current on their payments, with good credit and a stable job, should not be selling into a mucky market unless financially forced to do so. Now, with 2011 barely on its feet, this homeowner has had a big change of heart and a very clever one. A contemplation of his situation led him to a new conclusion. If home prices continue on their downward slide, he reasoned, his current home might slip underwater. It that were to happen, the option of selling his current home, capturing even a small bit of equity, and then moving up to the next home would evaporate. Further complicating his worries would be a rise in interest rates. The future home he would buy could go down in value. However, if he waited a year or 2 the mortgage rates could be in the 6-8% range rather than the 4.75-5% he was looking at now. Making a 20-30 year outlook on his final home purchase it was starting to make sense that selling his home at a lower price now would make up for it in the long run with the lower interest rate. He recognized that if his family which was expecting a new child were ever to be able to move up, unless he acted now, they might lose their best chance. So, determined that his instincts were right, he put his recently re-financed home back on the market, but this time priced it to sell. He dropped his asking price until he found a buyer, and one assumes that with a clean seller, and a clean buyer, the fair market price was reached. The final price was a full 32% below the price he'd sought last year, and 9% below the appraised value in 2010. I thought about this and it was making sense to me that this would be looked at 20 years from now as a good decision. Voila! The “something new”! Owners with homes currently above water, but who previously planned to sell only after the market seems to stabilize, may conclude that this is actually the last and best chance to retain whatever amount of equity they currently have.Should this happen in large numbers, there will be a new slew of houses washing up on our beaches, with owners who will take what they can get for fear of having to take even less or , worse, being stuck in an underwater home next year. So, has “something new been added” or is this an anomaly? Only time will tell.