Skydive

We have all heard it. The real estate bubble has burst or is at the very least deflating. Homeowners in approximately two-thirds of the country are watching their home equity melt away. While bemoaning the fact your equity loss is painful, there is still time to look sensibly for housing deals and act accordingly if we begin reassessing how we view real estate.

This article is the first of a series that will provide an explanation of the phenomenon of the housing bubble, why it had to burst and perhaps most importantly, how we should now approach housing as the housing market corrects. Rest assured, the long term picture of rising property values will return as it is fundamently still your best and most important investment. However, in the meantime we need to take stock, just as we would any investment, and assess which way to go from here.

Unless you are a professional investor, most people view their home as a place to live and raise their family while paying bills using wages earned in a growing local economy. Perhaps it is time to look at your home for what it really is a commodity. And just as any commodity, whether it is common stock, pork bellies or real estate, it is subject to the same economic principles that will make its price increase one day and fall the next. The only real difference is the amount of time it will take for the housing market to respond to those factors influencing its price.

What is it that causes your home to have value? The obvious answer is and always will be how much demand is there by potential buyers of your home. Think of it a like selling art. Its selling price is determined solely by what others will pay for it. If the art looks as if it were scrawled on the back of an envelope, you will have few buyers. Conversely, if the art has mass appeal, much like the famous Currier and Ives prints seen so frequently on classic Christmas cards, then there will be more potential buyers.

The greater the number of potential buyers creates the demand (as defined in economic terms) for your home. If you are located in an area where the local economy is brisk, companies are expanding, everybody is enjoying an increasing standard of living, there will obviously be greater demand for housing in the area as more job seekers move to the community in an effort to cash-in on the local prosperity. If you are one of the lucky ones who own a home in the community, the increase in the value of your home is a direct result of its demand. You can see from this example that the value of your home is not a reflection of the construction cost, but rather demand. This is the very reason a home in Sioux City, Iowa is priced less than a home of comparable size and construction cost in Boston.

How expensive must house become before no one will buy? Let us look at an example that has existed in numerous communities in California and south Florida. We will use an an example someone who wishes to purchase a home in California. In this market it is quite common to pay in excess of $450,000 for a 1,300 square foot house. If this small house were purchased with the buyer financing 95% of the purchase price ($427,500) using a typical 30-year, 6.125% mortgage, the monthly payment for only principle and interest would be $2,453. Since most mortgage underwriting limits the maximum monthly payment the homeowner may make to 28% of gross income, the buyers combined annual household income must be not less than ($2,453 x 12) / 0.28 or $105,151 excluding taxes and insurance. And just what percentage of households in California have an income this great? Fewer than 10%! This in no way implies there are nott numerous families who wish to live in the area. It is simply that there are few families who are able to qualify for the requisite financing.

As housing prices increase, the fewer families are able to secure the necessary financing. This situation has spawned a whole group of mortgage programs designed to permit more individuals to qualify for larger mortgages allowing the purchase of these higher priced homes. Mortgage programs that have emerged vary from numerous types of adjustable rate mortgages to those that during times of higher interest rates result in payments which are less than the amount required to pay only interest. The risk of this type of mortgage is that it creates greater debt for the homeowner. Many of these mortage programs effectively cause the homeowner to gamble on creating home equity through appreciation without any debt retirement. This is a good bet when the demand by potential qualified buyers is larger than the supply of available houses in the market, but what happens if there is either an increase in mortgage rates or even worse an economic downturn in the local or national economy.

As interest rates for mortgages increase, fewer prospective buyers are able qualify for the a mortgage. As the number of qualified buyers becomes smaller, home owners must reduce the cost of their house in an effort to sell. Those who remember the when Jimmy Carter was President may also recall that the Federal Reserve Board during the 1970s caused mortgage money to be loaned at interest rates in excess of 14%. During this period many homeowners discovered that if you could sell your house it was usually at a loss. The price of housing was almost in a freefall because the number of individuals who could qualify for a mortgage was so small in relation to the large quantity of houses for sale. Supply had exceeded demand creating a buyers market. While this does not compare to the minor increases experienced recently by the mortgage industry, it does point to the reason home prices have been reduced in most overheated housing markets.

Now that you have the basic economic fundamentals of supply and demand, what do you do if you currently live in one of these formerly hot markets. The answer is very simple. TAKE THE MONEY AND RUN! In investment circles this is called profit-taking. However, remaining in the same market requires you to re-invest your profits returning to the same financial position as you were before. Hence, my recommendation is to consider seriously the advantages to relocating to a city where both housing is more affordable and it is possible to enjoy the same or better quality of life. I am not going to recommend you move to the middle of the Mohave desert, but rather to a location the value of housing is appreciating. Just as anyone with a sound investment strategy, your simple goal is to sell high, take your profits and buy low with the reasonable expectation that you will again be able to do it again.

I would like to introduce you to a little gem you should consider for your next home address. Located within a two hour drive of sandy ocean side beaches and a three hour drive of world class mountain ski resorts this metro area provides all any family could desire — plus the potential of a solid 7 percent growth on your home value rate as predicted by Veros Real Estate Solutions. This area has moderate climate with little snow each winter. So where is this little gem? Raleigh, North Carolina.

Formerly thought of as just another sleepy southern city, Raleigh North Carolina began capturing headlines because of its growth in the late 1970s. Fueled, in part, by the Research Triangle Park in conjunction with three major research universities: Duke University, NC State University and the University of North Carolina, Raleigh has grown consistently and now rates as a technical and cultural center in the region.

The US Census Bureau currently ranks Raleigh North Carolina together with the adjacent city Cary North Carolina the 10th fasting growing metropolitan area in the United States. Forbes magazine has named Raleigh North Carolina the 2nd best place for business and careers. Kiplingers Personal Finance has named the Raleigh-Durham area one of the Seven Cool Cities for Young Professionals. Rated the 3rd most educated city in the country by the US Census Bureau, Raleigh provides a wealth of talent creating what Entrepreneur magazine has called 3rd Hottest City for Entrepreneurs.

Check Raleigh, North Carolina out. Look at how much your housing dollar will buy where the advantages are many and housing is still affordable. The local multiple listing service can be accessed through a number of real estate agencies serving the Raleigh regional area — where you can discover how taking the money and running to Raleigh, North Carolina could be the smartest move you will ever make.

Tim Butler
http://www.articlesbase.com/finance-articles/time-to-change-your-real-estate-strategy-68955.html

This entry was posted on Tuesday, September 29th, 2009 at 11:59 pm and is filed under freefall. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.