Housing bubble..

[GMichael]

Well it happened. I knew it. I just inked the contract to build a new home on Friday. Today the paper says that prices are coming down in our area. Grrrrrrr.....

[mystic]

Well it happened. I knew it. I just inked the contract to build a new home on Friday. Today the paper says that prices are coming down in our area. Grrrrrrr.....

Over the long-run prices should continue to rise. You should be ok if you plan to live in the home for a long time. I lost a liitle on a house I bought in the late 1980's and sold in the early 1990's. However, if I still had that house and were selling now, the price would be triple what I paid.

I do think there is great risk in some of the "creative" financing arrangements buyers are using.Today's CNN describe a kind of ARM that sounds scary. I'll quote CNN:

"The riskiest is called an option ARM, which features several payment choices each month, including a standard interest-and-principal payment, an interest-only payment and an interest-only minimum payment that's so low it doesn't cover the month's interest charge. The unpaid interest is rolled into the principal, meaning that -- yes -- you're charged interest on your unpaid interest."

The article goes on to say this means your mortgage grows instead of shrinking.

[topspeed]

Well it happened. I knew it. I just inked the contract to build a new home on Friday. Today the paper says that prices are coming down in our area. Grrrrrrr.....
If it's any consolation to you, you won't be lonely. Some parts of the country such as Texas and the Midwest have been in a downcycle for over a year now. Other areas that are dramatically over-valued (read: Caliornia) will see the same adjustment in the very near future. Don't sweat it though. As Mystic said, if you look at RE as a long term investment instead of day trading, you'll do just fine.

[GMichael]

Over the long-run prices should continue to rise. You should be ok if you plan to live in the home for a long time. I lost a liitle on a house I bought in the late 1980's and sold in the early 1990's. However, if I still had that house and were selling now, the price would be triple what I paid.

I do think there is great risk in some of the "creative" financing arrangements buyers are using.Today's CNN describe a kind of ARM that sounds scary. I'll quote CNN:

"The riskiest is called an option ARM, which features several payment choices each month, including a standard interest-and-principal payment, an interest-only payment and an interest-only minimum payment that's so low it doesn't cover the month's interest charge. The unpaid interest is rolled into the principal, meaning that -- yes -- you're charged interest on your unpaid interest."

The article goes on to say this means your mortgage grows instead of shrinking.

I passed on MOST of the creative financing. But I did go with the 10 year fixed rate that changes to an adjustable after 10. I do have the option to switch to a 30 year fixed at the end of the construction period (est. April 2006). Rates will most likely go up by then though. I'm counting on the rates to come back down within the next 10 years. If not, I'll need a raise or a second job. My wife works at a bank and gets 1 point off on loans. But they don't do construction loans. If rates don't go up too much in the next 6-9 months I can switch to her bank and go for the 30 year fixed rate before the C.O. After the C.O. I'm locked into the loan I have unless I want to pay another closing charge.
I do plan on being in this house for many years (knock on wood). But, as I'm only putting 10% down, I was hoping for it to be evaluated 10% higher than my cost to build so I could avoid the PMI charge. Not that it's alot, but why pay it if I don't have to?
I knew it, I knew prices would come down. I predicted that they would as soon as I signed the contract. But I still hoped that I'd be wrong.

[GMichael]

If it's any consolation to you, you won't be lonely. Some parts of the country such as Texas and the Midwest have been in a downcycle for over a year now. Other areas that are dramatically over-valued (read: Caliornia) will see the same adjustment in the very near future. Don't sweat it though. As Mystic said, if you look at RE as a long term investment instead of day trading, you'll do just fine.

Thanks Top,
I'm sure we'll be ok. But I bugs me to know that I am paying the highest price possible. Dang I hate being right!

[Woochifer]

If you plan to stay in your home long-term, and you didn't way overextend on the financing, then it doesn't matter what the housing prices are doing in the short-term. Here in Sili Valley, I know people who bought their homes at the peak of the late-80s housing bubble. For years, they actually owed more than their house was worth, but they needed a place to live and if they tried to sell their home, where would they move and how would they pay for it? They stayed, and over the last few years, they've more than recovered the value on that home.

Also, there are two ways to look at housing -- in terms of use value and exchange value. Unlike other investments, homes have very high use value because we live in them, and unlike other investments that have high use value (such as automobiles), homes don't automatically depreciate their exchange value the minute we move in and can still appreciate despite wear and tear. The housing bubble is more of an exchange value issue, i.e. it's primarily an issue if you're looking to make a transaction gain. Unfortunately, a lot of other facets of the economy are tied to that exchange value, and IMO that's where the real economic impact occurs. (i.e. reductions in consumer spending, slowdowns in the sectors tied to residential real estate such as construction, mortgage lending, appraisal, brokerage, etc.).

[GMichael]

If you plan to stay in your home long-term, and you didn't way overextend on the financing, then it doesn't matter what the housing prices are doing in the short-term. Here in Sili Valley, I know people who bought their homes at the peak of the late-80s housing bubble. For years, they actually owed more than their house was worth, but they needed a place to live and if they tried to sell their home, where would they move and how would they pay for it? They stayed, and over the last few years, they've more than recovered the value on that home.

Also, there are two ways to look at housing -- in terms of use value and exchange value. Unlike other investments, homes have very high use value because we live in them, and unlike other investments that have high use value (such as automobiles), homes don't automatically depreciate their exchange value the minute we move in and can still appreciate despite wear and tear. The housing bubble is more of an exchange value issue, i.e. it's primarily an issue if you're looking to make a transaction gain. Unfortunately, a lot of other facets of the economy are tied to that exchange value, and IMO that's where the real economic impact occurs. (i.e. reductions in consumer spending, slowdowns in the sectors tied to residential real estate such as construction, mortgage lending, appraisal, brokerage, etc.).

Thanks Wooch,

We're not OVER-extended. But still, it feels like someone was up there watching me and saying, "There, Mike signed, it's OK to lower housing now." Now I'll have to pay that darned PMI charge. It's just a smidge over $150 a month. There go the maggies I wanted.

[Woochifer]

If it's any consolation to you, you won't be lonely. Some parts of the country such as Texas and the Midwest have been in a downcycle for over a year now. Other areas that are dramatically over-valued (read: Caliornia) will see the same adjustment in the very near future. Don't sweat it though. As Mystic said, if you look at RE as a long term investment instead of day trading, you'll do just fine.

In the Bay Area, it looks like the market correction could have already started. In July, the median home price went down and sales were down as well. And from what I've read elsewhere, the number of listings on the MLS has been way above the numbers from last year.

A friend of mine in Sili Valley sold her place a couple of months ago, and plans to rent for at least a year before she goes looking for a new place. With the windfall she got from the sale, she paid cash for a new car and plans to take a month-long vacation at the end of the year. She's basically betting that the market has peaked, and that she will have some decent housing deals to choose from by this time next year.

Up to this point, the optimists have been mostly right and the article below quotes a guy from Dataquick who says that July was only a temporary hiccup and projects new record highs in August. The guys who've been projecting a market correction say that it will happen at some point, and I think the correction would have occurred already if not for the huge growth in these alternative financing methods. The articles below talk about what the July numbers point to, and also the drastic steps people have resorted to so that they can buy a home in the Bay Area.

Totally agree with you on viewing real estate as a long-term investment. In most cases, homeowners come out ahead if they hang onto their home for a long time, and they got a place to live in the meantime.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/08/17/BUGAJE8R9P1.DTL

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/08/18/MNGNDE9H7V1.DTL

[GMichael]

In the Bay Area, it looks like the market correction could have already started. In July, the median home price went down and sales were down as well. And from what I've read elsewhere, the number of listings on the MLS has been way above the numbers from last year.

A friend of mine in Sili Valley sold her place a couple of months ago, and plans to rent for at least a year before she goes looking for a new place. With the windfall she got from the sale, she paid cash for a new car and plans to take a month-long vacation at the end of the year. She's basically betting that the market has peaked, and that she will have some decent housing deals to choose from by this time next year.

Up to this point, the optimists have been mostly right and the article below quotes a guy from Dataquick who says that July was only a temporary hiccup and projects new record highs in August. The guys who've been projecting a market correction say that it will happen at some point, and I think the correction would have occurred already if not for the huge growth in these alternative financing methods. The articles below talk about what the July numbers point to, and also the drastic steps people have resorted to so that they can buy a home in the Bay Area.

Totally agree with you on viewing real estate as a long-term investment. In most cases, homeowners come out ahead if they hang onto their home for a long time, and they got a place to live in the meantime.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/08/17/BUGAJE8R9P1.DTL

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/08/18/MNGNDE9H7V1.DTL

HAHAHAHA
We plan on the "a lot of peanut butter and jelly" method. That's great.
Well, I don't feel so dumb knowing that the "experts" can't even agree on what will happen. Can't help this feeling in my bones that says prices will drop though. Maybe it's just paranoia. But just because I'm paranoid, it doesn't mean that no one is out to get me.
Hey, who said that? Who's there? Show yourself...!

[topspeed]

I thought this article was pretty interesting.
http://money.cnn.com/2005/08/15/real_estate/buying_selling/markets_set_to_fizzle/index.htm

[dean_martin]

Thanks Wooch,

We're not OVER-extended. But still, it feels like someone was up there watching me and saying, "There, Mike signed, it's OK to lower housing now." Now I'll have to pay that darned PMI charge. It's just a smidge over $150 a month. There go the maggies I wanted.

Yep, PMI sucks. I bought in January and got stuck with the PMI (although I put as much down as I could, it still wasn't enough to eliminate PMI). I asked whether I could make an early lump sum payment to the principle that would get rid of the PMI. The closing agent said no because it was an FHA loan. That really wasn't all that expalnatory. I believe that you should be able to pay a lump sum to get rid of PMI and lower your monthly payment because the PMI charges only last for a certain period of the loan. Everything's negotiable if you push hard enough. I'll check with the bank. Of course my laying down a big chunk of money at one time would depend on a bonus, but it could happen.

We just went through a period of extremely inflated real estate values on the Alabama gulf coast. Even unrepaired properties that were damaged by Hurricane Ivan were going for almost 2x the prices before Ivan. People were making offers at $10,000 more than the asking price on properties from 650K and up just to make sure their offers were accepted. It was unbelievable. Now, the market is settling back down, but there's no bust yet.

[GMichael]

Yep, PMI sucks. I bought in January and got stuck with the PMI (although I put as much down as I could, it still wasn't enough to eliminate PMI). I asked whether I could make an early lump sum payment to the principle that would get rid of the PMI. The closing agent said no because it was an . That really wasn't all that expalnatory. I believe that you should be able to pay a lump sum to get rid of PMI and lower your monthly payment because the PMI charges only last for a certain period of the loan. Everything's negotiable if you push hard enough. I'll check with the bank. Of course my laying down a big chunk of money at one time would depend on a bonus, but it could happen.

We just went through a period of extremely inflated real estate values on the Alabama gulf coast. Even unrepaired properties that were damaged by Hurricane Ivan were going for almost 2x the prices before Ivan. People were making offers at $10,000 more than the asking price on properties from 650K and up just to make sure their offers were accepted. It was unbelievable. Now, the market is settling back down, but there's no bust yet.

PMI is charged if you don't put down 20% as a down payment. I was told that after we reach the 20% mark the bank does not have to remind us, but if we ask in writing they have to remove the charge. I don't know if that is the case in all states. And I don't know what an FHA loan is or how it's different.
Durring the early years of a loan, most of your payments go toward interest. So getting to 20% on the priciple can take awhile. If the assesment on this house turns out to be 10% higher than what I am paying, then the 10% we already put down would be enough for us to skip the PMI. Even if it's only a 5% increase, we have the option to pay the difference, in one lump as you say, to beat it. But if the assesment turns out to be lower, yikes!

[mystic]

Paul Krugman talks about the housing buuble in his column today in the New York Times online. He thinks Alan Greenspan is partially to blame. I'm not sure I agree, but his reasoning is interesting(see link). I'll quote one thing he said:

"As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China."

http://www.nytimes.com/2005/08/29/opinion/29krugman.html

[twochannelsonly]

Cograts GMichael on the new place :) you should be very happy.

I just moved into a 3200 sq foot 42 year old house myself last september. Feels like a new house since it was taken care of so well :) sure cost alot to heat and ac though...LOL

[GMichael]

Cograts GMichael on the new place :) you should be very happy.

I just moved into a 3200 sq foot 42 year old house myself last september. Feels like a new house since it was taken care of so well :) sure cost alot to heat and ac though...LOL

Thanks 2C,

How's it going with that castle of yours? Think insulation! Congrats.!

Mine will only be a little over 2200 when finished. But it's just the two of us so it will be fine.
Now all I have to do is get used to everyone being nice to me. Here in NY I know how to deal with someone giving me a hard time, but I don't know how to act when the people in Pa are so frickin' nice all the time. A little voice in the back of my head keeps telling me that they must be up to something.

[piece-it pete]

I'm not sure what's going on, but even here in a "backwater" area like Cleveland houses are suddenly languishing on the market.

I have just had a horrible experience with PMI. While I spoke to the underwriters' main office, I asked about how to get rid of it, as I have had major construction on the home and should be at about 20% equity right now. She said "No problem, you'll get a letter with contact info right after the close".

OK, I did, called, and was told I MUST pay PMI for FIVE YEARS, and then to get rid of it I must be at 78% of the ORIGINAL PURCHASE PRICE!!!

Can you say rip off? Remember, Wells Fargo Mortgage - hoolie bait shysters. After asking around I have found others that had problems with them.

Refinancing is my only way out.

Pete

[GMichael]

I'm not sure what's going on, but even here in a "backwater" area like Cleveland houses are suddenly languishing on the market.

I have just had a horrible experience with PMI. While I spoke to the underwriters' main office, I asked about how to get rid of it, as I have had major construction on the home and should be at about 20% equity right now. She said "No problem, you'll get a letter with contact info right after the close".

OK, I did, called, and was told I MUST pay PMI for FIVE YEARS, and then to get rid of it I must be at 78% of the ORIGINAL PURCHASE PRICE!!!

Can you say rip off? Remember, Wells Fargo Mortgage - hoolie bait shysters. After asking around I have found others that had problems with them.

Refinancing is my only way out.
Pete

And pay closing again? Yuck. But you may be better off in the long run if you can come up with that lump. Or rolling the closing costs in may even cost you less than the PMI charges. Worth looking into I guess.

[piece-it pete]

Yeah it STINKS. But with the PMI at 5% of my monthly payment refinancing is a no-brainer. I'd like to roll to a fixed rate anyway.

BTW, yes, they're up to something :D .

Pete

[GMichael]

BTW, yes, they're up to something :D .

Pete

I knew it! They have a plan. There are being nice so I'll let my gaurd down. That's when they'll sneek up and....

"You've got to be trusted by the people that you lie to." Where's that knife?

[EFE Speakers]

Money and Markets Wednesday, September 28, 2005

Dear Investor,
The housing market bust we’ve been warning you about has now begun.
You cannot yet see home values sinking.
Nor will you hear any bells ringing when they do.
But we now have a rapidly growing body of evidence that the market has reached a peak and is in the early stages of a sharp decline.
First, the inventories of unsold homes has suddenly surged — not just for existing homes but also for new homes.
Second, the sales of new homes have just plunged.
Third, higher interest rates are now beginning to choke off demand, with Fed Chairman Greenspan warning stridently about the risks of still higher rates.
Fourth, in the stock market, the shares of home building companies have begun to suffer sharp declines, signaling the likelihood of equally sharp declines in home values.
Today, we will give you the hard facts, as we see them. Then, we will make some tough recommendations, based on where we think real estate is headed.
Naturally, where you take it from there is entirely up to you. But no matter what you decide today, please keep an open mind. If you begin to personally witness the first stages of a real estate bust in your area, don’t close your eyes.
Remember our facts and the warnings you’re reading here today. Then make a rational, objective judgment.

Here Are the Hard Facts ...

When there’s a shortage of homes on the market, home values rise. When there’s an over-abundance, home values fall.
There’s simply no escape from this simple reality. And anyone who thinks the law of supply and demand can somehow be repealed for the housing market is going to wake up to the shock of their lives.
Right now, the supply of unsold new homes has just ballooned to 479,000 units, the highest in history. Even assuming no further decline in the pace of sales, that’s 4.7 months of supplies, the worst reading since June 2000!
If this were strictly true about new homes, it might be questioned.
But existing home supplies also surged — by almost 100,000 units between July and August. At 2.86 million units, they are now the highest in over 19 years — since May 1986.

If home sales were rising apace, it might also be questioned.
But home sales have just plunged 9.9% to a seasonally-adjusted annual pace of 1.24 million units in August, down from 1.37 million in July.
If there were no obvious reason for the decline in home sales, you might argue that it’s a fluke.

But alas, Americans have the most powerful reasons in history for recoiling from home buying:

The affordability of the average American home is now the worst since 1991, even with today’s still-low interest rates. There has been no lack of warnings or publicity about the danger of a bust.

Even Fed Chairman Alan Greenspan is now warning homebuyers to proceed with great caution ... Greenspan Issues His Most Strident Warning So Far

With his long reign coming to an end, it appears the last thing Alan Greenspan wants is to go down in history as the Fed Chairman who presided over America’s greatest real estate boom ... but never warned us of America’s greatest real estate bust.
We believe that’s why, in recent weeks, he has stepped up to podium after podium, each time raising the pitch of his warnings by several octaves.

Consider for example, his comments this week:

Second home purchases “arguably are at historically unprecedented levels.” — Alan Greenspan

Yes, the National Association of Realtors recently said vacation home buyers and other real estate investors accounted for more than a THIRD of all home purchases. These aren’t primary homes; they’re pure investments, like high-flying stocks. And when Americans get nervous about their investments, they could start dumping their properties en masse.
“Speculative activity may have had a greater role in generating the recent price increases
than it customarily has had in the past.” — Alan Greenspan

Of course. It’s a bubble. We knew that. Now, however, with officials like Alan Greenspan confirming the dangers, the press will be more definitive in its warnings ... speculators will start selling ... and demand for homes will plummet.

“The apparent froth in housing markets may have spilled over into mortgage markets.” — Alan Greenspan

This is a major change in Mr. Greenspan’s views. Last year, for example, he said: “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.”
We welcome the Chairman’s change. But we fear that for many home owners buried in debt, it may be too late. “The vast majority of homeowners have a sizable
equity cushion with which to absorb a potential decline in house prices.” — Alan Greenspan

This view will also change. Sooner or later, Mr. Greenspan will recognize that the averages are misleading, reflecting the Americans who bought their homes years ago.
The reality: The vast majority of recent home buyers and speculators have no such cushion. Moreover, just as in a stock market crash, you don’t need a majority to get the ball rolling. All it takes is a small minority — far less than 10% — of investors to begin selling ... and you could see a cascade of home price declines.

Plunge in Housing Stocks Signals Risk of Decline in Most Home Values

You can’t call your broker or check on the Web to find a reliable quote on the average American home. And even if you could, it would not be up to date.
So by the time you get firm confirmation that home values have begun to fall in your area, they could already be down substantially. And if the selling frenzy is anywhere near as intense as the earlier buying frenzy, the decline could be precipitous.
But you can get a glimpse of what might be ahead by checking the price of housing stocks; and right now, they are falling.

Toll Brothers, for example, has come down from its recent closing high of $58.25 on July 20 to $41.51 on September 20. It rallied a bit in recent days, but yesterday turned back down again, closing at $43.35 late last night. We see the same pattern with Lennar Corporation — down from its high of $68.27 to its recent low of $53.49.
Like the housing market itself, these leading home building companies had a major run this year, and it’s too soon to say their rise has been reversed. But it’s also too soon to say their bust has already begun.

What To Do Right Now ...

Nearly everyone’s situation is unique. But there are some general principles that we feel should apply almost across the board:

Step #1.
If you’re looking for a place to live, rent. Do not buy at this time! Last Sunday’s New York Times explains why: After five years in which rents have barely budged while house prices in New York, Washington, Los Angeles and elsewhere have doubled, renting has become a surprisingly smart option for many people who never would have considered it before. Owning a home often ties up hundreds of thousands of dollars that might be invested more safely and more lucratively elsewhere over the next decade. And while real estate brokers may hate to acknowledge it, home ownership involves its own versions of throwing money away, like property taxes and the costs of borrowing. Add it all up — which The New York Times did, in an analysis of the major costs and benefits of owning and renting, including tax breaks — and owning a home today is more expensive than renting in much of the Northeast, Florida and California ...

In the Bay Area of California, a typical family that buys a $1 million house — which is average in some towns — will spend about $5,000 a month to live there, according to the Times analysis. The family could rent a similar house for about $2,500, real estate records show, and could pay part of that bill with the interest earned by the money that was not used for a down payment. In Manhattan, 1,000-square-foot, two-bedroom apartments on the Upper East Side now rent for about $3,700 a month. Buying a similar apartment costs around $1.1 million, which can translate into monthly payments of $6,000 or so.

The single biggest misconception about home ownership, some brokers and economists say, might revolve around tax deductions. Many people seem to believe that buying a home can actually save them money because the interest on their mortgage is tax deductible. But all that deduction does is reduce the cost of borrowing the money — a cost that would not exist if the family were not buying the home.We agree. In most regions of the country — especially the housing boom areas — the advantages of renting today far outweigh the disadvantages.

Step #2.
If you own strictly your own residence, the choice of whether to buy, hold, or sell is primarily a personal, family decision — not an investment decision. Investment property, however, is another matter entirely. If you are making a decision about investment properties, carefully consider the risk factors we’ve just told you about and recognize that, in a real estate bust, their value could decline sharply.

Step #3.
If you decide to sell now, you won’t have to sell in haste or at a steep discount. You can afford to wait for a fair price, or better.
If you wait, however, don’t expect the same result. You may find yourself in a market that’s continually sinking faster than you drop your prices.
So once you’ve made the decision, go ahead and list the property without delay. Remember that holding onto real estate isn’t like holding a stock. You also have to factor in the cost of carrying your mortgage. Right now, the average mortgage outstanding is between 5 or 6 percent. But if you bought a long time ago and have not refinanced, your cost may be in excess of 8 percent. If you have an ARM, check the contract carefully to see when and how the rate will be adjusted. If the fixed-rate period is expiring soon, rising rates could add significantly to your carrying cost. Property taxes. Some localities cap tax increases to a couple of percentage points a year. But others don’t, and because home values have skyrocketed, so have property taxes. Condo or neighborhood association fees, management fees, repairs, and more. Don’t underestimate their cost — let alone how much they can go up. Sure, rental income can help offset these costs to a degree. But as The New York Times has pointed out, renters are at a great advantage right now. Landlords are not.

Step #4.
Sell for cash only! In this market, there should be no need to accept promissory notes or other paper. Then, place the proceeds of the sale in a portfolio of investments that help protect your principal and protect you against threats to the economy.

Some Major, Burning Questions from Readers Still not convinced? Then, consider these questions, along with our answers.

Question 1.
If I sell my home now, where will I live?
Consider this scenario: You sell now and pocket a large sum, possibly tax-free. You cut your monthly living expenses by renting a comparable home for less money.
A few years from now, when real estate prices are far lower, you repurchase a similar or even better property at a lower price, if you wish. Or you can just retain the flexibility of renting for a few more years. With home values down, you shouldn’t have to be concerned about rising rents for quite some time.

Question 2:
What about the capital gains tax hit I take by selling?
If you’re selling your primary home and you’ve lived there for at least two of the past five years, you can generally avoid paying taxes on up to $500,000 in gains (for married couples). Yes, you may have to pay taxes when unloading a second home or other investment property. But, as with any such tax, you or your heirs will have to pay it someday, no matter what. So don’t let the tail wag the dog. Base your decision on your financial needs and where you think the market is headed — not on any tax consequences.

Question 3:
But my real estate broker tells me that banking my equity right now is crazy. Why should I be among the few who are cashing in?
You’re not. Millions of homeowners have also cashed in. But they’ve done it in a different, riskier way: They’ve borrowed against their equity via second mortgages and home equity lines of credit. Many have cashed out on their equity from one property and using the proceeds to buy another ... and another ... and still another.
Others have embarked on even riskier ventures with the borrowed funds — like investing in volatile stocks. Indeed, the National Association of Securities Dealers is apparently so worried about this trend that it has issued special alerts about the dangers involved in using liquefied home equity to invest in stocks. Heed their warning: If you’re cashing out, do so prudently. Pay off your debts and put away most of the net proceeds in a safe place, like a money market fund that invests strictly in short-term Treasury securities.

Question 4:
I was just transferred. I need to buy a new home right now. What should I do?
First, consider renting. Second, if you do decide to buy, avoid buying with a high loan-to-value mortgage. Sadly, lenders will encourage big borrowing without batting an eyelash. But now that the market is slowing and prices may soon be going down, you could end up upside down, or owing more than your home is worth.

Question 5:
If mortgage rates go up like you predict they will, won’t buying a house get more expensive? Shouldn’t I rush to buy now to lock in low rates while I still can?
Not necessarily. Remember: The affordability of a home is determined by both interest rates and price, with the price usually being the more important of the two.
Indeed, even with low interest rates, homes have become less affordable in the last few years. So don’t base your purchase decision solely on interest rate trends. Factor in what you expect for prices, too.

Question 6:
We’re looking at a new home that we can either buy now or a year from now. We have estimated what our monthly payments would be if (a) interest rates go up and, at the same time (b) the price of the home goes down. But it’s pretty much a wash. So what difference does it make? You’re thinking strictly about your monthly payments. But what about your principal? If the value of your home goes down, so will your net worth.

Question 7:
I have a big chunk of my net worth tied up in residential real estate, including my home. For both sentimental and financial reasons, I must hold on. What can I do to protect myself from the fact that values may suffer a downturn?
Your best protection is to keep the balance of your net worth relatively safe and liquid, with a substantial portion in short-term Treasury securities or equivalent. If you have speculative funds, also consider investments designed to go up in value in the current environment. These investments are not for everyone. But they can help reduce your overall exposure and risk. For example, you can buy long-term put options (LEAPS puts) on some of the most vulnerable housing stocks. Or, you can join the service we edit together. It is especially designed to capitalize on rising interest rates and falling real estate stocks, using with options. For more details, click here or call 800-815-2917.

Question 8: My wife and I haven’t seen residential real estate values go down in our entire lifetime, and with the kind of boom going on right now, we may never see a decline. So why should we wait to buy?
You’re right in that we don’t have a good historical precedent. Most residential real estate busts in the past half century have been limited to certain regions and short periods of time. For example, home values plunged in southern California after the booming ’70s, in Texas and Louisiana in the wake of a 1980’s oil bust, and in New York City after the Crash of ’87. We haven’t seen a nationwide housing bust since the Great Depression.
However, so much is new and different about the current boom — the 45-year lows in interest rates, the big growth in riskier debts, and the rush of speculative buying — that recent history is mostly irrelevant. Plus, we see real estate declines already getting under way in countries like Australia and Britain where interest rates rose sooner than they did in the United States. The same is likely here.

Bottom line:
You need to look beyond the U.S. and beyond history and face the facts in the most rational and prudent manner possible. If you do, we think you will agree that more caution is urgently needed.

Best wishes,
Martin Weiss and
Michael Larson

About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

[GMichael]

Just one question: If I won't hear any bells ringing, where is that sound in my head coming from?

[piece-it pete]

Excellent, thanks.

Another thing to consider: My brother-in-laws' brother ( :) ) is a high-end contractor/remodeler (as in, will mill his own trim on site, etc) , and talking to him last night he said lumber and drywall has already doubled in price.

Pete

[topspeed]

Great info, Ed. Thanks