“I am panicking. I recently put down $45K to buy my home and am beginning to feel as though it might not prove to be the best investment decision I have made. What will I do if home prices drop and my home is now worth less than when I brought it? I‘m hearing everyone say Don‘t buy, don‘t buy, don‘t buy. Sit by the sidelines and wait a while. Even if I try to sell, it seems like it may be difficult to recoup my money. What am I going to do?”
A true quote from a new homebuyer.
In some ways, the metaphor “The sky is falling” seems appropriate as we look at what is currently happening in the lending and housing markets. Here are a few headline stories for the past few weeks:
- US Jan construction spending down 0.8 pct as home building falls
- Sub-prime: The risk to Wall Street
- Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey
- Mortgage Applications Decrease In Latest MBA Survey
- A Nasty Surprise on New Home Sales
- Index Shows Housing Prices Fall in Jan.
Clearly, the trend is pointing towards an abatement in what was recently a ‘red hot housing market’. Does this mean homeowners need to panic? Certainly not. When the ‘sky starts falling’ homeowners may want to take out their umbrellas.
Many homeowners in the New York community have owned their homes long before the prices started to take off. Ownership occurred during a time when down payments of 10% were the norm and available mortgage products were conservative in their design as opposed to the ‘exotic brands’ we see now. These homeowners are likely the least at risk as market conditions change.
What about the homeowners who have recently purchased their home? There are several factors to consider to determine one’s ‘risk exposure’. The decrease in home value should not, in and of itself, be an indicator of risk. Over the past few decades, home values have typically doubled each ten year period. Even during downturns in the economy, home values have increased from one 10 year period to another. What this means for the new homeowner is, even if home prices fall and you are left with ‘negative equity’ as a result, 10 years out, you are likely to be on the plus side again. If you’ve purchased your home as a place to live, keep living there until compelled to sell. The decision to sell should not be based on an immediate, short-term concern around home value alone. That would be like my purchase of shares of Dell Computer 15 years ago. The concept of stock/equity investments was new to me. I got a few hundred shares at $15 a piece. I panicked when it hit $13 a couple weeks later so I dumped my entire holding in the company. What happened to Dell during the next 10 years? They became the market leader in personal computers and their share prices increased 800% from my original purchase price. Lesson to be learned? Of course? Think long-term. If you can afford to wait out this downturn then get out that umbrella and whether the storm.
Does this mean that everyone should stay put? I say no. Some investment / purchase decisions are truly unwise and may prove to work against a new homeowner in the short and long term. Regardless of the type of mortgage or home, if payments cannot be maintained, it is important to be realistic about what the next few months or year(s) may bring. Many adjustable rate mortgages are now resetting, leaving buyers with much larger payments than anticipated. Other mortgage products are resulting in negative amortization, meaning that instead of the loan getting paid down, the loan amount along with its payments are increasing beyond the value of the home. Yet, some homeowners not in possession of such ‘creative mortgage products’, are facing a similar risk to ongoing homeownership. During this climate of liberal lending practices, buyers were approved for loans that they couldn’t really afford. Items like increasing property taxes, homeowners insurance and fuel costs may not have been considered when the math was done. Oil prices at $65 / barrel (during past year) have a very different meaning to a home owner than oil at $40 (price prior to this most recent housing boom). Your home is ‘gas heated’? Guess what? Those prices have gone up as well.
The next step if ownership appears in danger? Don’t delay in contacting your lender to discuss the restructuring of a loan. Lenders do not want to be in the business of owning real estate and may be willing to work with you to minimize the risks of foreclosure. If this is not an available option, then a sale of the home that cannot be financially maintained might be a prudent next move. Consulting with a realtor to explore this option ahead of time can be important. Houses are generally considered stable investments, but anyone competent financial advisor will tell you, it is not a ‘liquid investment’, meaning most homes don’t sell overnight. If time is not necessarily on your side, you don’t want to dawdle.
As real estate professionals know well, this market is very cyclical. During this current downturn, you just may need to get out that good, sturdy umbrella and wait for the weather man to announce that the clouds are rescinding and skies are looking clearer again.
Good Tidings
David E. Smith
www.BedStuyRealEstateGuy.com
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