While there is a lot of negative press about homeowners underwater in their mortgages, it’s far from a non-reversible trend.  “Underwater” in a home mortgage means that the homeowner owes more than the current value of the home in the marketplace.  This market value is heavily influenced by the number of foreclosure properties, as well as how quickly they are removed from the market.

Many foreclosures leave the market when they’re purchased by investors who either resell them or turn them into rental properties.  Supply and demand in the marketplace means lower home values when there are a large number of foreclosure properties being sold at very low prices.  But, think of past stock market “crashes.”  In many cases, stocks were back to values at or near their pre-crash prices within months.  Market arbitrage experts would buy in at the point of greatest dismay and lowest prices, and things would gradually return to a more normal market condition.  Many of the stocks reached bottom pricing far below their true fundamental values.

While values are down with high foreclosure inventories with homes changing hands at very low prices, the cost to build a home hasn’t dipped in the same way, or much at all.  Materials and labor are still experiencing low but steady inflationary pressures, and current selling prices are below what it would cost to build the home.  So, as our population grows and as demand for homes is steady or growing, this clearing out of the low priced inventory will come to an end at some point.  When these low prices are no longer available, home prices should again approach more realistic levels related to what it costs to recreate the home.