We now can safely say that the housing boom has officially ended. This morning, the National Association of Realtors reported that sales of existing homes dropped for the sixth consecutive month. At the current rate, approximately three quarters of a million LESS homes will be sold this year compared to the peak reached one year ago in August of 2005. While sales have sagged, rapid appreciation has all but disappeared. Most homes have seen little or no appreciation in 2006 and the trend looks like it will continue into 2007. If you read my special report, “Boom to Bust: How to Prepare, Protect and Profit When the Bubble Bursts”, you know that I believe we will see significant declines in home prices in many markets. The question you must ask yourself is this; am I prepared to profit or will I get slaughtered when the correction comes?
Specifically, you MUST know the answers to the following questions:
- What are the terms of my home financing? Is your loan fixed or adjustable? Is it a hybrid that now is fixed but will be adjusting in the future? Is it fully amortizing, interest-only or even negatively amortizing? In the next year, nearly $2 trillion of adjustable rate loans will reset to current market levels, which are significantly higher than when those loans were taken out. Many, if not most of those loans, are interest-only or negatively amortizing. If this situation describes your financing, you must have a plan of action to guard against payments rising 20-50% or higher.
- How much can my mortgage payment increase? If your loan does not have a permanently fixed rate, you absolutely have to know how much your payment can increase in a worst-case scenario. You need to know which index your loan is tied to, what margin will be added to the index and how often it will adjust. All of this information is in your loan documentation but nearly everyone I talk to lacks an understanding about these key issues.
- How much equity do I have and how much would it cost to sell my home? At the height of the housing boom nearly all first-time buyers were using some form of 100% financing. That strategy meant that they had no equity when they closed escrow. With the market up significantly, most people feel that they are safe from a downturn but they fail to factor in how much it will cost to sell the home. Between commissions and closing costs, you will see 5-10% of your home’s value go up in smoke. If you need to sell quickly in a flat or soft market, you will likely need to discount your home compared to others on the market. If a current conservative estimate of the value of your home does not show you have AT LEAST 20% equity, you must have conservative fixed rate financing or consider selling the property before the market softens further. Otherwise, you may not be able to sell the home at all.
I cannot stress enough how critical this issue is to your long-term financial health. You can’t afford to put your head in the sand and ignore the possibility of a housing downturn. If you are a homeowner, I implore you to do your homework and see how much real estate risk you face. If you would like help with assessing your situation, I highly recommend that you call my mortgage expert, Josh Lewis, at 888-944-JOSH. Josh will walk you through the process of analyzing your current financing and equity position, while comparing it to the financing available today.