Staying Secure if the Real Estate Bubble Bursts
Securing Your Home Ownership During Down Times
I'm sure you've heard talk about the real estate bubble that some experts feel parts of the United States are experiencing. A bubble occurs when real estate values balloon very rapidly, creating an over-inflated market that can quickly burst and send prices in a downward spiral.
Real Estate Bubble or Boom?
Even the experts can't agree which parts of the country are in a bubble. Some feel many locations are having a real estate boom, which is regarded as a more healthy growth that's not so likely to suddenly reverse itself.
Boom.... bubble... there's often not a clear line between the two, so it makes sense to always try to protect yourself from the potential risk of any downward trend.
Expert Bubble Watchers
The PMI Mortgage Insurance Company watches trends closely. Its Summer 2005 risk report names cities the company believes are at most risk for a bubble burst. Many are coastal cities and Boston heads the list with what the organization predicts is a 55.3 percent chance for price declines. Long Island and four cities in California are the next highest risk areas on the company's list.
Who's at Most Risk from a Bursting Bubble?
Home Owners with Little Equity
Equity is the amount of home ownership you can actually claim as yours, the difference between what you owe on the home and what it's worth.
Maybe you just bought the home and you used a no-down or low-downpayment loan to finance it. Or you've obtained home equity loans and used the cash to make purchases that aren't associated with increasing the value of your home.
Both of those scenarios leave you with little equity. If your equity is borderline now, and the real estate bubble bursts, you might be stuck with negative equity, where you owe more for the house than it's worth.
That might not be a problem as long as you can stay put until values come back up--and they probably will in time.
But if you have to move while values are down it might be difficult to pay your mortgage and closing costs and still have enough left over to buy a replacement home in your new location.
Home Owners with Adjustable Rate Mortgages
If you chose an ARM for its lower initial payments because you knew you'd move before the first rate hike, and the bubble bursts, can you make those higher payments until property values come back up? Interest-only loans create the same problem if it's time for the interest and principal payments to kick in--and remember that initially they don't provide any required payment to lower your principal.
If you have negative equity it might be more difficult to refinance in order to switch loan types.
Anyone Who Must Move
If you have good equity in the house you certainly have the ability of selling it and moving on. Home owners who have high equity after living in a home for some time might be sorry they didn't sell when prices were high, but they can typically sell without a loss. Home owners who made a hefty down payment, bu bought during bubble growth, will take a hit if they can't wait for values to come back up.
Common Sense Bubble Tactics
- Keep your overall debt load as low as possible to help you manage an unplanned move
- Use equity funds to increase your home's value, not buy luxury items
- Try to buy a home with good resale potential
Pay attention to your local market. Watch sales trends and read what your local and regional experts have to say about a potential real estate bubble in your area, but keep in mind that even the experts don't agree on where, when--or if--the bubble will burst. If it does, just hang in there, because over time real estate is a great investment. Prices will rise again.