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# Mike Heayn: Falling home prices still leave homeowners with equity
- URL: https://www.smdp.com/mike-heayn-send-comments-to-editor-smdp-com-real-estate-101-acquiring-a-home-is-never-bad-news/
- Published: 2007-11-21T16:00:00.000Z
- Updated: 2026-10-25T01:16:38.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

THERE ARE MANY FACTORS THAT GO into valuation, but the real value of something is ultimately determined by what someone else will pay for it. If everyone decided that the value of gold was $1 an ounce, eventually the price would drop to everyone’s expectation. This same principal can be used with home sales. In Southern California, home prices were the highest in history in 2006\. Now it seems like news comes out everyday that home values are dropping.

It becomes difficult to think about buying a home in a declining real estate market, but if you look at the facts it may not seem so daunting. Home prices are expected to drop approximately 5 percent this year and about the same in 2008\. However, those existing homes went up in value over 50 percent in the last five years. Let me break it down: If you purchased a home five years ago in 2002 for $500,000, that same home would have been worth $750,000 in 2006 at the height of the real estate market. In five years, you built $250,000 in equity by just living in the house and paying the mortgage. Now if the price drops by 5 percent or $37,500, the new value is $712,500\. Sure, $37,500 is a lot of money to lose, but in this example, you still have $212,500 in equity-not including any down payment you placed on the property. Now if the value drops another 5 percent or $35,625, the home’s value would be $676,875 in 2008.

If you take a step back and forget about the equity you could have had and simply look at the return on investment over seven years, you will see that you made $176,875, or a 35 percent return based on the property’s value. However, if we take a closer look and take leverage into consideration, the return is much higher. Assume you placed a 10 percent down payment on the property or $50,000\. Your return on investment jumps to 150 percent+ because you made $176,875 off the $50,000\. Aside from the return on investment, you have also received other benefits, such as a tax break.

The US government wants you to own a residence. The government will allow you to deduct the interest you pay out to the lender each year for the property from your personal tax return, which is a great incentive and a major reason so many Americans are able to afford a home.

Sure, in the example, you made a great return on your investment, but people will say “I could have made a lot more.” If you wait out a declining market, your home value will eventually hit the 2006 high value it once achieved. One intangible aspect of owning a home is that it provides shelter and a place you own. Every time you come to your condo, townhouse or house you are actually coming home – that is something you cannot put a value on.

The purchase of a home is still considered one of the best investments a person can make. If you have owned a home for the last several years, you probably have equity that you can use to buy other real estate, pay for your children’s college education or simply have piece of mind just in case something happens. If you are looking for a home because you have a growing family, getting into a home is probably more important than the state of the real estate market. In the long run, no matter how much property values drop, a home is still considered a person’s best investment.

MIKE HEAYN is a Washington Mutual Multi- Family Loan Consultant. He 310-428-1342, or e-mailed at

*Originally published in the Santa Monica Daily Press print edition on November 21, 2007.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/112107.pdf?ref=smdp.com)