Home ownership in a declining housing market

Sell it? Keep it? What do you do as housing prices decline?

As anyone who has been following the real estate market for the last few years knows, the housing market has peaked. As investors turned away from red-hot tech stocks in the late 1990’s, more and more people elected to invest in real estate instead. This, along with interest rates that bottomed out near historic lows, caused the housing market in the United States to heat up to previously unknown levels. In the past five years, home prices tripled in some markets.

But interest rates have risen and as prices became unaffordable, fewer people have been looking to buy houses. This has led to a downturn in the housing market, and properties are not selling nearly as quickly as they were, even in formerly hot markets such as southern California. The changes in the marketplace have left a number of homeowners bewildered - what do you do in times of a housing downturn?

If you are in a position where you are forced to sell, such as having to move because of a job transfer, you could have a problem. With thousands of homeowners taking advantage of aggressive home equity lending in the past few years, many homeowners now owe their lender more than their homes are worth in the current market. If you live in an area where housing prices have actually declined, that situation could be even worse. A 125% home equity loan is a great idea - unless you have to sell the house before you pay it off.

If you are in such a situation, you will have to somehow make up the difference between what you owe and what you receive. That can be expensive; many homeowners have had to resort to tapping their 401(K) account or other retirement funds to make up the difference. Others, who weren’t so lucky, may have to simply walk away from their homes.

This would be a good time to examine your mortgage and see if you can do something to economize. Rates are expected to continue to rise, so now would be a good time to think about trading in your adjustable rate loan for one with a fixed interest rate. The payments may be a bit higher in the short term, but over time you will probably save money, particularly if rates increase to the 8% or 9% levels that were common about 15 years ago. Many people who took out adjustable rate loans three years ago are going to see them suddenly spike as their rates adjust for the first time. Now would be a good time to look over your loan situation.

For homeowners who don’t’ have to sell right away, the best advice would be to sit tight. While prices do tend to rise over time, market fluctuations can rise and fall in the short term. As a rule, they seldom, if ever, fall and stay there. The key is to be patient and to remember that the main reason you bought your home in the first place is because you needed a place to live. As long as you remember that your home is a dwelling first and an investment second, you should be OK in the long run.