Home Prices Decline 3.5% - It's a big deal

The median price of a home in the US fell by 3.5% over last year's number, to $221,000: the biggest decline on record. If 3.5% doesn't sound like a lot to you, remember that most people buy homes on leverage, i.e. mortgages.

Suppose a year ago you bought a median priced home for $229,000. You put 10% down, so you invested $22,900 of your own cash money. Now suppose the price declined by about 3.5% to $221,000. You've just lost $8,000 of your $22,900, or 35% of your investment! If you turn around and sell it tomorrow because you're afraid the market will continue to decline you'll probably incur transaction fees ranging around 6% (real estate agents, escrow fees, etc), which would wipe out your investment completely. But if you don't turn around and sell it tomorrow, and we have another bad year or two, you could soon owe the bank more money than your house is worth, even though you put down 10% of the money yourself.

And with prime at over 8%, let's hope you didn't buy on a variable rate mortgage, because your payments could soon jack up without giving you the benefit of any additional equity.

Rising interest rates mean some people won't be able to make their payments. Declining prices will mean some people won't be able to solve their payment problem by selling. Hang tight, there's going to be a shakeout.