Mermelstein: 'We have become dependent on using our homes as the family piggybank'

ONLY ON THE BLOG: Answering today’s OFF-SET questions is Edward A. Mermelstein, real estate attorney and co-founder of international real estate law firm Rheem Bell & Mermelstein LLP, a multiservice real estate law firm with offices in New York and Moscow. Mermelstein is admitted to practice in the State of New Yorkand is fluent in English and Russian.

On Tuesday, the S&P/Case-Shilller housing index reported that home prices hit another new low in the first quarter, down 5.1% from a year ago to levels not reached since 2002. Prices are now down 32.7% from their peak set five years ago. From your point of view, what impact does this news have on the general economy?

There is no doubt that the decreased home prices have a significant impact on the economy, both financially and psychologically. We have become dependent on using our homes as the family piggybank. However, the report fails to highlight the bright spots in primary markets such as New York and Washington DC.

OK, in a separate S&P/Case-Shiller study of 20 cities, only Washington, D.C. posted a gain in home prices-4.3 percent over the past 12 months. Why Washington?

As the government becomes bigger, the number of people it employs increases.  All these new employees in DC need space to work and live.  The US government has grown significantly in size over the past several years under the new administration and the impact is quickly reflected in the real estate market.

Please explain why a house that may have been worth $400,000 a few years ago would not be worth at least that or more today?

As foreclosed properties and short sales–when the homeowner decides to sell the property for less than the outstanding mortgage–drive pricing in a downward direction, the impact is felt by the surrounding properties.  In addition, the tight lending market continues to be a roadblock for new buyers who can take advantage of the depressed pricing.

What do rental prices have to do with the price of homes? Isn't it always better to buy if you can afford it?

We are finally seeing home prices across the country become more attractive than rental prices.

Unfortunately, the hurdles set by lenders are preventing many renters from taking advantage of the situation.

This will change as the interest rates head north and the banks loosen their purse strings.

How are those multi-million dollar mansions doing that we see in fancy magazines? Have prices on American palaces also gone down?

While pricing has been depressed across the board, the luxury market has fared better, especially in areas that are not known as vacation spots.  If your luxury home is a primary residence and is surrounded by the same type of owner, you have most likely weathered the storm. On the other hand, if your fancy home is by a beach or ski resort, the results have been far worse.

Is anyone in government or the business community in a position to improve home prices?

Less government intervention in the housing recovery will help the sector turn around quicker. What will make the biggest difference is lower unemployment and a rise in interest rates, paired with some relaxation of lending practices.