McGinn: What Is Your House Really Worth?

Lisa Gilman doesn't normally discuss her weekend television-watching habits with her boss. But on a recent Monday she was compelled to tell him about "My House Is Worth What?," a show on HGTV in which real-estate agents tour a home and tell its owners how much they could get for it. In the episode Gilman saw, a couple was ecstatic when an agent told them their house was worth … drumroll please … $1.5 million. "These people were jumping up and down," says Gilman, who was dumbfounded by the spectacle. "It floored me that they were so happy. No one had offered them $1.5 million."

For Gilman and her boss, Richard Goulet, talking about the cost of real estate is more than just an idle pastime. Goulet is president of the Appraisers Group in the Boston suburb of Belmont, Mass., and Gilman is a vice president and one of his top residential appraisers.

They work in a profession that brought no end of joy to homeowners during the real-estate boom. During those years a visit from a real-estate appraiser felt like a visit from the tooth fairy. Times have changed, of course. I'd guess my house in Massachusetts has dropped in value by 15 percent over the last two years. Today, when I plug my address into Zillow.com, a home valuation Web site, seeing the number that pops up makes me feel less as if I've been visited by the tooth fairy and more as if I'm about to undergo a dental procedure.

To get a sense of how professional appraisers are calculating these declining values, I arranged a ride-along with Gilman as she figured the toll the housing bust is taking on a five-bedroom Victorian whose value soared during the boom. We hop into her Toyota and drive to the top of a steep driveway in nearby Arlington, Mass. Weeds grow out of broken concrete alongside the decrepit swimming pool. On the porch a decapitated doll head sits amid a pile of debris. The house is empty, foreclosed on by a mortgage company earlier this year.

Outside, I feel somewhat as though I'm caught in a "CSI" episode, as Gilman has me hold the end of her tape measure while she outlines the foundation, confirming the house is 4,308 square feet. Inside she snaps digital photos, sketches the floor plan and reconstructs the story of this house, and what went wrong for its owners.

Back in 1997, the house sold for $370,000. By 2002 it sold again for $715,000, and property records show that the new owners replaced the home's siding, windows and flooring. To pay for all those renovations, Gilman guesses the new owners borrowed heavily.

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.

Let's hope they temper their enthusiasm. Too much of our boom-time excitement was over paper wealth. For a few years we lived through a nationwide house party fueled by backyard-barbecue chatter, less than scientific Zillow estimates and vague notions of value.

In boom or bust, Gilman's reaction to that HGTV show offers real wisdom. Until you have an accepted offer in your hand, there's never a reason to get too excited about what your home is—or isn't—worth. As national home prices head toward their first year-over-year fall since the Great Depression, this will remain one of the enduring lessons of the good times we've left behind.

Daniel McGinn is a national correspondent at NEWSWEEK and the author of House Lust: America's Obsession with our Homes, to be published by Doubleday this winter. To preorder it, click here.