Housing market changes and how they affect you

Should you worry about loss of equity? What should you do?

The housing market has been very busy during the last five years. With interest rates low and investors looking into real estate rather than risky tech stocks, the market simply exploded, raising prices to record levels. Homes have become almost unaffordable in parts of the country, and long-time homeowners have used the increases in housing values to take out record numbers of home equity loans.

But, as these things always do, the market has softened a bit. Stratospheric prices have cooled consumer and investor interest and rising interest rates have made loans more expensive. In some markets, prices have started to fall.  Along with that, existing homeowners have begun to worry about the value of their investment and whether or not they are losing equity in their homes.

As a homeowner, what should you do about the current market situation? Panic? Do nothing?

It all depends. Each homeowner has his or her own set of circumstances. No one paid the same amount for their home and no one has the same debts, or plans, or needs. You need to take a look at your own situation and consider some of the following items:

Do you plan to stay in your home for the foreseeable future? This is the major consideration. While the public generally assumes that property values will always rise, that isn’t always the case. Still, most people do not buy houses for investment purposes; they buy them because they need a place to live. If your home currently meets your needs and expectations, isn’t unaffordable, and is one in which you plan to live for many years, you need not do anything. Just keep making your payments and you will be fine. If you aren’t selling and aren’t investing, then the general rising and falling of the housing market should not overly concern you.

Do you currently have a home equity line of credit? Rising interest rates might make an outstanding balance harder to repay. You may wish to either pay off your credit line or convert your line to a fixed rate home equity loan.

If you do not currently have a home equity loan and you see that prices are falling in your neighborhood, don’t rush out to take one out “before your equity disappears.” If you do this and your equity does disappear, you will be left with debts that exceed the value of your property. That is not an enviable position, especially if you find that you need to sell the house at some point. The last thing you want to do when you sell a house is write a check.

If you are buying a house, you should probably try to avoid certain types of risky loans that may keep you from making payments on the principal. Such loans include interest-only loans and Option ARM loans. These loans, which artificially keep payments low, are not well suited towards building equity in the old fashioned way, which is by paying down principal. If prices are not rising, the only way you can increase your equity is by paying more. Taking out a loan that is not suited to paying principal will not help you.

The bottom line - in a fluctuating market, keep an eye on what is happening. Don’t borrow when rates are rising and values are falling. It’s really all just common sense.