Prior to the financial collapse of the late 2000s, buying a home was often viewed as a no-brainier for those who could afford it. Everyone needs a place to live, and homeowners stand to make a profit if the value of their home goes up. But the values of homes are unpredictable, and a variety of underlying factors can lead to a sharp decline in a home's value.
A home's value is the amount that it would fetch if it were sold on the open market. Prices in any market that has many buyers and many sellers are determined, in part, by the amount of demand in the market. During tough economic times, buyers have less money to spend, so they cannot afford to pay as much for housing, which weakens the demand and leads to lower prices.
Too Many Homes on the Market
An oversupply of homes in a particular market can cause the value of homes to drop. Home buyers usually set out to purchase a home in a specific area, so they are limited to buying homes that are for sale in that area. If there are few homes for sale, buyers must compete over the pool of homes, which tends to drive home prices higher. When there are many homes for sale in a neighborhood, buyers have more options and sellers have to complete to attract buyers, so prices tend to fall.
When a borrower fails to make payments on a mortgage, the lender has the option of foreclosing on the home so that it can sell the home and regain some its losses. Foreclosures can drastically reduce the value of a home because banks often want to get rid of properties as quickly as possible to avoid ongoing expenses. According to a study conducted by MIT, the results of which were published in 2010, a foreclosure reduces the value of a home by about 27 percent on average. Foreclosures can also damage the value of neighboring homes because they set expectations about prices in the area.
Lack of Maintenance
A home's value can drop quickly if it is not properly maintained. A host of hazards such as winter weather, storms, leaky roofing and general wear and tear can lead to serious problems like water damage, burst pipes, mold and infestations if they are not addressed. Problems caused by lack of maintenance can cost thousands of dollars to remedy, and buyers may factor the extra cost into the amount that they are willing to pay for a home. Even cosmetic issues such as unkempt landscaping can decrease a home's value.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.