If California Home Prices Dropped 20% How Much Money Would Be Lost?

Question

I think 20% is a reasonable drop, the Median home is about 550k. There are 18 million homes in CA. How much equity will be lost if they drop an average of 100k each?

What if it was only a 10% drop?

Do the math....it's a major shock to the economy.

The amount of $1.9 trillion in that example is low compared to what most economists are predicting nationwide. The loss of that equity will kill Southern California - where the economy is ONLY doing well because of people spending the equity which has built over the last 7 years. Equity evaporating is loss of potential to invest.

I'm talking about the macroeconomic impact...not the impact on an individual. Everyone will be impacted by the magnitude. If 5 trillion of equity is wiped out as conservative estimates suggest...that will kill the economy. That is equal to 6 mos GNP.

Answer 1

First off I sure the drop will be more like 35-55% . The reason for this is that is at lest how much they have inflated the prices.

http://www.breakingbubble.com/

As far as loss of equity goes that is only for equity for those who have it. Many many will be up side down they do not loss equity what mortgage company losses secured loan and is in danger of the debtor of walking away.

There is a up side of these losses and that is the hedge against inflation.

Answer 2

No money will be lost - only equity. They are not the same thing. However I do think the loss of equity will have a tremendous impact on the economy as people will be forced to live within their means and not use their home as an asset.

Answer 3

Well the Subprime Market is getting the door closed on them by the Investors so with that said you will probably see a decrease in home values from the 1st time Investors who went out a limb with there option arm mortgages. So pull out the mattress money and start purchasing real estate because those renters who could not finance are going to need places to live.

Answer 4

You are thinking short term, and housing is usually considered long term.

If you own a home for 10 years, a drop in the market values means nothing if you don't sell your home.

If your home goes up one year during the 10 years you own it on an average, and you don't sell it, it means nothing.

You actually have a situation when you go to sell it, and it has decreased in market value.
Sometimes, it still means nothing because you may replace it with another home in another state (if you move), and that home may be 10% cheaper also.

In the long term, you must consider that California homes have gone up an average of 5 to 10% for each year of home ownership, and some much much greater increases since many homes are owned by some of the richest people in USA, (Oprah now also has a California home), and they don't care about the price of a home. It's location, location and location.

GOD bless us always.
MBA-Boston Univ.
CPA-retired

Answer 5

When a home any place else in America would cost sixty grand and in CA it cost 600 grand, I would say it's going to hit more than 20 percent. There will be so many go totally broke by paying interest only on these outrageous prices.

Answer 6

It's only a shock if everybody needs to sell. What's the difference if you don't????