Financial Reality had an excellent piece about Real Estate Prices that discusses the current situation for buyers and sellers in this over-valued housing market. But what does this mean for a Boomer who is a home owner, an investor and worried about financial planning for upcoming retirement.
What is the current situation?
Over the past several years there has been a significant run-up in the price of houses in many areas. Easy credit, creative financing, fear of being priced out of the housing market due to rising prices and massive housing building have created an opportunity for buying and speculating.
What could happen?
As prices rise higher, there are fewer buyers. Interest rates are going up which will mean higher monthly payments for those with adjustable financing based on current interest rates. Many creative low- and no- interest loans come due in the next year, which will lead to a rise in monthly payments that many borrowers will no longer be able to afford. This in turn will lead to more houses on the market as many of these home owners will be forced to sell or face foreclosure.
What should I do?
If I had an adjustable rate mortgage, I’d refinance now with a fixed rate mortgage – this ensures that mortgage payments will remain constant (and manageable). If I could not afford the payments on a fixed rate mortgage, I probably can’t afford this house. I’d consider downsizing into something that I can afford with a fixed rate mortgage or I would rent. Rents are generally very affordable right now and will allow me to buy back into the housing market when prices come down to earth – they will come down a lot. Really.
If I had bought real estate for speculation, I would sell it now, and be realistic about price. In some areas, prices are already coming down. In others, prices are still high but there aren’t many sales. Better to get out now. In a few months, it may not be possible to sell at any price – there just won’t be any buyers. That is what happens at the end of a real estate bubble like we are seeing – sellers can’t/won’t sell for prices that buyers can pay so there are no sales at all at any price.
Then what happens?
Folks who wait to refinance thier adjustable rate mortgage may find their payments could skyrocket – increases of +50% are not unheard of. Can’t afford that? Too bad. If the borrower can’t sell the house, the lender will foreclose and these folks are out on the street with an even bigger debt and/or bankruptcy. However, if you refinanced with a fixed rate that you can afford, you should be ok.
Those who have some cash can wait for the terrific buying opportunities that will be coming in the next few years. Eventually, prices will plummet and there will be lots of foreclosed properties that the lenders must sell very cheaply, perhaps for as little as 10-30% of their highest valuation. It has happened before and it can happen again.
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