Reassessing the Boom

Last fall the owners listed the home for sale at $1.125 million. "The agent told them to reduce it to $999,000, and at that price it probably would have sold," Gilman says. But they didn't—and by early this year the lender had taken possession of the property.

To confirm Gilman's suspicions I later go online and examine the house's trail of mortgages. It turns out she guessed right—and in its own way this house provides an illustration of how Americans' willingness to borrow against their houses changed so dramatically in the last decade. Ten years ago the family that bought this house put 10 percent down and took out a conservative, fixed-rate 15-year mortgage from a local bank. When the new owners bought the house in 2002, they put nearly $200,000 down and borrowed $536,000 from a big national mortgage lender. But 13 months later they refinanced, taking out an adjustable-rate loan for $700,000. Four months later they borrowed again, this time tapping $875,000. By 2005 they owed $980,000.

Presumably, this family figured rising property values would bail them out. They probably asked $1.125 million for the house last fall because they needed that much to pay off the mortgage and pay the broker's fee. Sadly, they miscalculated.

Back at her office, Gilman crunches the numbers. After examining the "comps" and totaling the property's pros and cons, she declares an appraised value of $725,000. If the new owners fill in the pool and add some nice landscaping, she tells me, they could boost the value by $50,000.

Is the property "worth" $725,000? It's a tricky question. In hope of quickly cutting its losses, the lender has agreed to sell it to a family that's paying just $610,000. That means these new buyers are paying about half what the previous owner thought it was worth last fall—which is either an indication of how far prices have fallen, or how irrationally exuberant some of us became while the good times lasted.

I can only imagine how the buyers will react when Gilman tells them they're buying the house for $115,000 below its appraised value. They may even jump around when they hear that magic number.