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The Value of Your Home in a Changing Real Estate Market

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By Jeffrey 'Yitz' Stern

Real estate has been grabbing headlines due to problems in sub prime mortgage lending, tighter credit standards, and slowing home sales – and many Americans are asking two important questions:

 

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1. Will the value of my home decrease in 2007 and 2008?

2. What would a falling home value mean to my overall financial security?

This article will help you answer those questions while also suggesting how you can adjust to possible changes in today’s real estate market.

Let’s begin with two basic facts about real estate. First, the only sure way to know what any home is worth is to put it on the market. If you aren’t planning to sell soon, any short-term price volatility may not greatly affect you. Secondly, because all real estate markets are local, it’s difficult to generalize. Pay attention to the data on real estate values, trends and the number of homes for sale in your own market.

A Hot Market Turns Cool

In 2007, the U.S. housing market is in a transition – from a hot housing market to a cooler one. From 2000 through the summer of 2006, the median price of an existing U.S. home increased from $143,600 to $231,000, according to the National Association of Realtors (NAR), representing an annual appreciation rate of 9.0% per year. Homeownership rates, as a percentage of total U.S. households, increased from 64% in 1994 to 69% by 2005. Access to mortgage lending expanded, allowing many people to buy homes who previously could not qualify.

However, according to Zillow.com, home prices across most of the U.S. peaked in the summer of 2006, and then the great real estate boom began to unwind. Now, home prices have soared above the affordability level of most renters, and more homeowners are struggling to make mortgage payments. As adjustable rate mortgages reset at higher interest rates in late 2006 and early 2007, foreclosures increased sharply. In the first quarter of 2007, several sub prime mortgage lenders went out of business, leading to a contraction in mortgage availability and tighter credit standards.

Through mid-2007, home values were softening across many markets that had previously experienced strong gains including Florida, Arizona, Nevada and Southern California. As buyers grew more cautious, homes with "for sale" signs were staying on the market longer and the inventory of available homes increased, reaching more than a seven-month supply recently for the entire U.S., according to NAR.

Looking forward, the U.S. currently has far more homes on the market than buyers can absorb, especially now that credit standards have become more restrictive. That means prices in many markets probably will stay soft until the backlog of housing inventory falls to normal levels. Depending on interest rates and the overall health of the U.S. economy, this phase could take several years.

Looking forward, most homeowners should not count on a continuation of the appreciation rates of the past, and a conservative outlook acknowledges that home values could fall further. Even when the supply-demand balance stabilizes, future appreciation rates may be more in line with general inflation than with gains of the boom years.

Planning Ideas for a Cooler Market

• If you have been counting home equity as part of your financial nest egg, now may be the time to review your investment portfolio and make adjustments. For example, if you had planned to sell your home in 2-3 years and retire on the proceeds, you may need to change your time frame.

• If you have an adjustable rate mortgage (ARM) due to reset in the future, consider refinancing into a fixed rate mortgage. This may help to keep your future housing costs more affordable.

• Don’t be alarmed if you see houses in your neighborhood selling for less than you think they are worth. Some home buyers took on "more house and more debt" than they could afford during the boom years. Now, they may have no choice but to accept the best offer available.

• An important lesson taught by this real estate cycle is the value of protecting your credit by buying only what you can afford and paying bills on time. Some people were forced into the high costs of sub prime mortgages by low credit scores.

• Keep watching trends, especially the inventory of available homes for sale, in your local market. You can check the number of homes listed on the Multiple Listing Service for free at http://www.realtor.com. At the same site, you can see a list of homes in your neighborhood that have sold recently, along with sale prices.

This real estate cycle should remind everyone that: 1) no economic boom lasts forever; and 2) it’s a good idea to be conservative in projecting how much your home may be worth in the future. If you have been counting on your home equity for part of your overall financial security, now may be a good time to review your situation and perhaps make adjustments with the help of a professional advisor.


Posted by Jeffrey 'Yitz' Stern on 08/31 at 04:16 PM • Hits: 108



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