Seven False Assumptions - That Caused the Housing Crisis by Eddie Godshalk

Today's guest blogger is Eddie Godshalk, author of The Missing Keys to Thriving in Any Real Estate Market. It seems that the past year has meant news of record foreclosures in most cities and towns. In this post, Godshalk discusses the seven false assumptions he believes caused the Housing Crisis, and expands on the first false assumption.

Seven False Assumptions - That Caused the Housing Crisis by Eddie Godshalk

Here is the list of seven false assumptions that caused the housing crisis:

False Assumption 1: Real Estate Has Always Gone Up in Value, Thus It Will Continue to Go Up in Value

False Assumption 2: Existing Systems for Risk Management, such as FICO Scores and Rating Agencies, Are Adequate.

False Assumption 3: The system of Gaussian copula function was adequate and reduced risk of MBS.

False Assumption 4: Appraisals and MLS information are adequate to assess local risk and make a buying decision.

False Assumption 5: Licensed Real Estate Professionals, and the Web, Have the Most Current Information Available.

False Assumption 6: There is No Need to Have Current Local Information, Demographics, Economics, or Hyper-Local Forecasts, Since Macro Metro Yearly Data Is Adequate.

False Assumption 7: The Current Systems for Access Risk and Rates of Return of Real Estate Portfolios ARE Adequate.

Let's look at False Assumption 1: Real Estate Has Always Gone Up in Value, Thus It Will Continue to Go Up in Value.

Real estate prices in the United States have historically been on an upward trend, rising on average 1.6 percent in real terms between 1970 and 2005. However, this does not mean that prices increased every year in that period and by the same percentage in all locations within the country. For instance, between 1990 and 1995, inflation-adjusted prices of homes in the United States declined by 1.1 percent. If any individual purchased a house for residence or investment in that period and sold it before the market recovered, he or she may have realized a capital loss on that property because prices declined.

Moreover, the claim that real estate has always gone up in value, and thus it will continue to do so is a generalization that may not necessarily apply to specific localities. Real estate markets are local markets, in which any market’s stability and growth are affected by location-specific factors that influence supply and demand and therefore home values. Consider, for instance, the recent spurt in foreclosures, which has had a disproportionately heavy toll on real estate markets in, say, California and Nevada. An increased supply of distressed properties in those markets lead to large drops in home prices. However, foreclosure activity within each state may be concentrated in specific local communities, such as the Silicon Valley in California, which has seen a surge in unemployment.

Furthermore, there are over 1,200 Census Block Groups or hyper local markets in Silicon Valley. Income ranges from under $20,000 to over $400,000, prices range from under $100,000 to over $2,000,000, and the number of Short Sales ranges from near zero, to over 20% for some Census Block Groups. In addition, the medians are not correlated to the ranges, and the medians have changed over 8% since the yearly data was published by the free vendors that many sources quote.

Thus, any such local markets, including that in the Silicon Valley, CA, may have seen larger declines in home values than the state of California as a whole. Besides, these precipitous declines in California or Nevada may be taking place against home price increases in other parts of the United States. One example is Cambridge, MA, which recorded a 16 per cent annual increase in prices last year.

The Home Value Predictor™ ™ integrates various local market data into a model that forecasts price movements down to the level of a particular local community. Its broad and block-level market forecasts thus help avoid making investment decisions based on generalizations about real estate prices for the nation as a whole or for any particular local market.

For more information about The Missing Keys to Thriving in Any Real Estate Market by Eddie Godshalk visit www.homevaluepredictor.com For more of Godshalk's false assumptions that caused the Housing Crisis, visit his blog.

Eddie Godshalk bought his first investment houses in 1987, where he was a licensed agent in the Eastern U.S. From those humble beginnings, Eddie has gained more than 20years of real estate investment, business development and mortgage experience. Recently, Eddie gained praise for his ability to help average investors generate exceptional wealth using his revolutionary Home Value Predictor web-based real estate system.

Eddie received his MBA from San Francisco State University (SFSU) with a focus on building automated valuation models (AVM’s) and real estate finance. Using the Home Value Predictor technology, Eddie has purchased numerous properties with little money down, netting greater than two thousand percent return on equity investment per property.

After collecting more than four years’ worth of micro block data, Eddie and a team of SFSU and Berkeley PhD’s tested and back-tested algorithms. After testing more than eight mapping software applications, from Open Source to ESRI, the latest public version of Home Value Predictor was launched in mid 2009.

Eddie is committed to bringing the most accurate, reliable and relevant information to the real estate market Home Value Predictor is poised to redefine the way we think of real estate in the 21st century.