I'm not here to warn you of an impending real estate crash. How could I? I have no idea what the real estate market will do tomorrow or over the coming year, just as I have no idea how the stock market will do. And I doubt you'll find anyone else who can predict such things accurately and consistently. The future is simply uncertain.
When it comes to real estate values today, though, some experts see signs of an impending slowdown, if not a slump, especially in certain markets that have been red-hot over past years. For example:
- The Fed recently raised interest rates. This could discourage those who have been snapping up properties due to very low mortgage rates. (Check out the mortgage rates offered in our Home Center.)
- Prices have risen so much in many markets that many would-be buyers have been forced out of the market. I myself bought my first home two and a half years ago, and if I wanted to do so today in the same New England region, I'd either end up living in a hovel or still renting.
- Speculators buying properties to make quick profits have driven up prices in many areas. If the climate changes, they may suddenly withdraw, sending prices down.
For reasons such as these, the California Association of Realtors is forecasting home sales in California to fall by 2% in 2006 (from, admittedly, a record high in 2005). An ArizonaRepublic reporter notes that there are suddenly a lot of "Open House" signs around, signaling that homes are selling more slowly.
Preparing for the worst
If you're planning to stay in your home for a long, long time, you may do fine just by staying put. And if, like many reasonable people, you don't believe that the real estate market will swoon in any significant way, you might also want to take no action.
But for those who'd like to know how one might deal with an impending slump, here are some options:
Get a low interest rate
First off, consider nailing down a low interest rate. If you secured a fixed-rate mortgage in the past few years, your rate may already be very low. But if you got an adjustable-rate mortgage (ARM), you may be facing significantly higher rates in coming years. (Note, though, that if you plan to change homes in the near future, this doesn't matter as much.) I recently wrote about the decreased advantage of ARMs over fixed-rate mortgages, noting that:
Stop eating your equity
Too many people have been taking advantage of low interest rates to take out home-equity loans. These loans are wonderful when you really need them, and our current low-rate environment makes them compelling, but borrow with your eyes open.
If you've built up $60,000 in equity in your home and you take out $30,000 in order to remodel your kitchen or buy a new car or take a trip, you'll own, obviously, a lot less of your home. Should prices in your area fall considerably, you might end up owing more on your mortgage than your home is worth! If you need to sell and move, the sale of your home might not cover your mortgage obligation.
Downsize and diversify
A recent CNN/Money article advised that homeowners consider moving into a smaller, less expensive home, especially if your children are grown and have moved out. This seems like a good time to do so because home prices are still relatively high. If you cash out, and buy a less pricey abode, you'll end up with money in your pocket that you can deploy for more compelling investments -- perhaps diversifying into an outstanding mutual fund, for example (we can point you to some standouts), or even an additional piece of real estate, such as one you plan to rent out.
There are many benefits to downsizing. A more modest dwelling will result in lower taxes, insurance costs, utility expenses, and maybe even maintenance costs.
If you expect the real estate market to drop, you might want to review your portfolio and make some adjustments. Stocks in companies such as Home Depot
Remember, though, that I'm not predicting a real estate crash. For all I know, the current boom will continue for five more years, taking with it home-related stocks. That could well happen.
You can find great tips on buying and selling homes in our Home Center, which also features some special mortgage rates. Learn more about buying, selling and maintaining a home in these articles:
- Buying a House Is Easy!
- The Right Real Estate Agent
- Make Money as a Landlord
- A Mover's Survival Kit
- 10 Things to Know About Mortgages
- 10 Home Enhancement Tips
Home Depot is a Motley Fool Inside Value recommendation.
Selena Maranjian 's favorite discussion boards include Book Club , The Eclectic Library and Card & Board Games. She owns shares of Home Depot. The Fool has disclosure policy. Formore about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.