Housing. It's a topic that interests many of us. Homeowners wonder how quickly their home's value will rise, or whether (gasp!) it may fall in the near future. Others among us are would-be homeowners, waiting for the right time to snag a share of the real estate market.
Now that a new year is upon us, it's a good time to think of the state of housing in America today. I don't want to make any predictions, but I would like to draw your attention to some concerns and some reasons to be hopeful.
Reasons for good expectations
First off are interest rates. Since 2004, the Federal Reserve Board has raised the fed-funds rate (which influences mortgage rates) 17 times, from 1% to 5.25%. It has recently been leaving the rate alone, but with inflation not surging and the housing market slowing down, some people have been speculating that the Fed might soon cut the rate. Lower interest rates will likely spur more activity in the housing market.
Another reason you may be hopeful is related to location, location, location. Each nook and cranny in America is over- or undervalued to a different degree. Some once-hot areas are cooling down, but not everywhere is, and not at the same rate.
According to The Wall Street Journal, sales of existing homes were up in November (following another modest increase in October), reflecting "rebounding demand that suggests the economic fallout from the housing market's slump will be limited next year."
Reasons to worry
Lower interest rates that lead more people to buy homes sure seems like a good thing, but there's a dark side, too. For one thing, while lower rates mean more affordable mortgages, they can hurt savers -- those who would like to make more than a few percentage points in interest at the bank or in CDs and money market funds.
It's not all good news on the mortgage front, either, as great gobs of people have been signing up for especially risky mortgages, a trend that's probably not easing anytime soon. I'm referring here to instruments such as interest-only mortgages, "80-20" mortgages, and extra-long mortgages, such as 40-year ones. Interest-only mortgages offer low monthly payments, but you're paying off only the interest you owe in the first years, meaning you're building no equity for quite a while. With "80-20" mortgages, you get a main mortgage for 80% of your home's value, and a secondary loan (at a higher interest rate) to cover the remaining 20%. You essentially buy a home without a down payment.
Arrangements like these, along with people buying more home than they can really afford, have many homebuyers living on precarious ground. If they suffer a setback in their income level, they may not be able to meet their mortgage payments. This could lead them to lose their homes.
Another concern is that the vast majority of recent mortgages have been adjustable-rate ones (ARMs), not fixed-rate ones, even in this environment of relatively low rates. ARMs can make sense for many people, especially those who plan to sell their home within a few years. But those who plan to stick around may end up facing steep interest rates in future years, resulting in ballooning mortgage payments.
A recent study by the Center for Responsible Lending suggests that 2.2 million American households in the subprime mortgage market will lose their homes due to foreclosures. (Subprime loans made up 24% of the total loan picture in 1998, but they make up most of it, at 62%, today.)
What to do
So what should you do with all of this info? Well, remember that this is the big-picture perspective. Your particular situation is a small picture. Go ahead and save up a down payment for a home, if you're looking for one. Be smart about mortgages, research your options carefully, and don't take on too much risk.
If you're focused on real-estate-related investments, then consider whether you expect companies such as home-improvement giants Home Depot
Another way to find promising investment candidates is to examine the holdings of successful real-estate mutual funds. Champion Funds recommendation Third Avenue Real Estate Fund
You can learn a lot more about mortgages and the home-buying process in our Home Center, which features lots of money-saving tips and even some special mortgage rates, as well as in the following articles (it's actually pretty interesting stuff, once you get into it).
- 10 Things to Know About Mortgages
- Buying a House Is Easy!
- So You Want to Be a Landlord?
- 10 Home Enhancement Tips
- The Scoop on Buyer Brokers
- Mortgage Brokers Demystified