If you have been reading or listening to the news in the past thirty days, the big economic news is that the bond market has gone to hell and mortgage rates are on the rise.  The mortgage change began in February but then just as quickly lost speed as March turned into April.  But if you look at the market in the last two weeks rates shot up 10% from 3.4 to 3.8 percent.  Most of us are not looking to buy a house this Spring so in one sense we don’t care, but if you are getting divorced and discussing the value of your home, there is an interesting collateral effect as the Federal Reserve signals that “cheap money” (they call it “quantitative easing”) comes to an end.

For the first time since 2007 buyers this Spring found that some houses were actually the subject of bidding wars while others sold at or near asking price.  Our experience is that this has not occurred across the board but principally with desirable houses in desirable neighborhoods.


The reason for this is that buyers are nervous that as rates rise, they will no longer be able to afford the monthly cost of the higher mortgage and that they will “miss out” on the bargains of the past several years.  Fair enough.  The truth is that the huge bargains have been snapped up. And don’t be surprised that some of the folks who are buying today will be looking at their purchase a year or two from now with some sadness because demand for housing will weaken as the cost of buying rises.

But for each sale in this exuberant market there is a comp being posted on line that appraisers need to evaluate when deciding the value of a house undergoing valuation in divorce.  In theory, they could probably discount that comparable somewhat because of the sudden rush to buy homes.  They did the opposite in the down market when the only comparable might have been a house sold by a bank in foreclosure.

No appraisal can really dismiss a comparable sale because the market is “crazy” especially when it is not a distress sale but one in the open market populated with willing buyers and sellers. However, the fact that a neighborhood has a few sales at these new better prices does not portend a sustainable upswing.  People who are rushing to get what is left of 4% mortgage money better realize that they may stay in their home for several years to get the price they paid this Spring. And people going through divorce who would prefer to stay rather than move may well find that they “bought out” their spouse at a premium.

On a $100,000 loan amortized over thirty years the difference between 3.4% and 3.8 is only $23 a month or a little over $8,200 through the life of the loan.  Remember as well that this interest is typically a deduction from income for federal tax purposes.  That small amount is, of course, multiplied as the mortgage amount increases so that the $500,000 borrower is staring at a $40,000 difference.


This is not a real estate blog but many of our clients have a heavy portion of their net worth invested in residential real estate.  So when the Fels Institute of Government at Penn Published a State of the Philadelphia Housing Market in mid November we thought it worthwhile to secure and read a copy.

According to the survey home prices peaked both in the region and the country in the first quarter of 2007.  The last time we had seen a decline was from 1990 to 1994. We tend to forget that prices climbed as an amazing rate from 1998 to 2007 and that prices are currently in the same range as they were circa 2004-05.  Measured against 10 other metropolitan markets over the past 25 years Philadelphia housing grew 25% less in price than the other cities.  But, in typical Quaker style when we did plunge from the high, Philly houses declined by less than one-half of the decline in the 10 composite cities.  Where we feel like today is 2005 in home pricing our ten city neighbors are feeling more like mid-2003 in terms of value. Resorts fared the worst with losses of 61% in Las Vegas 51% in Phoenix and 45-48% on the Florida coasts when measured against the high.  Only Dallas and Denver fared better than Philadelphia.  Even the darling markets of Washington and New York was 26-27% declines from the peak.  Still, we will need to recover an additional 14% to get back to our 2007 peak.  We may not feel happy about what occurred but our house value declined later and was more modest than in our shoulder cities of New York and Washington, both of which will need to see another 25% price rise to recover that old time 2007 feeling.  Meanwhile if you had been in a Dow Jones index fund this entire time you are less than 2% away from the Dow’s all-time high in early October, 2007 of 14,006.


There is another unhappy aspect to consider.  Securities are highly liquid.  And while we are reporting that home prices are recovering, actual home sales remain very sluggish.  From 2002-through the third quarter of 2008 (the Lehman Bros crisis) the Philadelphia market saw pretty steady sales of more than 5,000 houses each quarter, the first quarter of each year excluded.  In 2012 just over 3,000 homes sold and our region has not seen us break 4,000 since second quarter of 2010. The quarterly average since 1995 has been about 4,300 homes per quarter and measured by sales alone in contrast to price, the data look more like 1995 than 2005 when we peaked at 8,000 homes sold each quarter.  Another approach to this is to look at the number of homes on the market.  From 2001 to early 2005 Philadelphia typically had 5,000 6,000 homes for sale each quarter. In 2005 that number began to spike reaching a peak of more than 12,000 homes for sale in late 2006 and again late in 2007. The number has bounced around between 9 and 11,000 homes since late 2007 with the current trend close to 9,000.  But this still means that in times of relatively stagnant growth we have one-third more homes on the market than we did eight to thirteen years ago.  So the lesson is that if you want your price be prepared to wait a long time and if you don’t have time, your price is going to have to be very competitive.


In the end, the news is not gratifying but before we start complaining it might be wise to remind ourselves that in comparison with almost all of the rest of the United States, we were not badly hurt.

The 2011 numbers are in an homes in America lost another 4% of their value last year. Add the rate of inflation for 2011 to that and the number comes to 7.16%. If you are settling your divorce premised upon a recovery of housing prices it would appear that despite a horrid second and third quarter, equities was the place to be last year.

The Case Schiller data do not look specifically at Pennsylvania housing prices. But if you want to feel good try looking at the data reflecting how far markets have fallen from their peak. From worst to best:


Vegas                                   60+ percent decline in value

Phoenix                                55+

Miami                                    50

Detroit & Tampa                    46%

San Diego & San Francisco       40%

Atlanta, Chicago, Minneapolis, Seattle     34-35%

New York & Washington DC      25%

Charlotte                                        20%

Boston & Denver                      12-14%

Dallas                                             10


Lawyers are not economists.  But the concern about future home prices has a demographic dimension.  Young people graduating from school and entering the employment market are doing so with an unprecedented level of debt.  That debt is going to impact their ability to afford housing for many years to come. Our history since 1950 has been for a new generation of affluent young people to “buy” their parents generation out of larger and larger homes.  Those days may be behind us.