Who isn't worried about the value of their home in this market? Numerous articles have been written about whether we're in the midst of a housing bubble and when the housing boom will end. The tone is reminiscent of discussions that occurred right before technology stocks tumbled in 2000. How concerned should you be about your home's value?
While housing prices have increased significantly in recent years, fueled by low mortgage rates and increasing family incomes, few believe there will be a housing crash similar to the recent stock market crash, for several reasons. First, the real estate market is not as homogeneous as the stock market. Housing prices in one part of the country, even if vastly overpriced, have little to do with housing prices in other parts of the country. Second, most people don't try to time the housing market. Even if housing prices seem high in your area, you're not likely to move across the country for a cheaper home. You need to live close to where you earn a living. Third, while it is possible for housing prices to decline, it is generally considered more likely that housing prices will simply level off for a while.
However, with mortgage interest rates starting to increase and many housing markets starting to soften, you should exercise caution. Whether you're getting ready to purchase a home, sell a house, or are just concerned about your current home, consider these tips:
- Don't stretch to purchase the most expensive home you can afford.
The reason homes have contributed so significantly to many people's net worth is that price appreciation is retained on the entire home, even though you only put down 10-20% of the purchase price. That fact has caused many people to strain their budgets and purchase the most expensive home they can afford, hoping increases in the home's price will more than offset the sacrifices made. However, if home prices start to fall, you could end up owing more than you can sell the home for.
- Try to make a significant down payment on your home.
While it is possible to purchase a home with a small or no down payment, that could be a risky strategy if home prices stagnate or decline. Since you have so little equity in your home, even a modest decline in prices could mean you'll owe more on the home than you will net from selling it. If possible, aim for a down payment of 20%, so you don't have to obtain private mortgage insurance, which typically runs from .25% to 1.25% of your total mortgage amount.
- Choose a home you'll be comfortable living in for several years.
When home prices are rising rapidly, you can purchase a home, live in it for a couple of years, and then sell it at a profit. With the prospect of modestly increasing or declining prices, purchase a home you'll want to live in for at least five or 10 years.
- Don't take equity out of your home.
While lower interest rates have allowed many homeowners to reduce their monthly mortgage payments, many have also opted to take equity out of their homes and to stretch mortgage payments over longer periods. One of the main advantages of home ownership is that it's a forced savings plan, with part of each mortgage payment going toward equity. Resist the urge to take that equity and spend it on something else.
- Look at locking in your mortgage rate.
While mortgage interest rates have been low for an extended period of time, they may start to rise as the Federal Reserve increases short-term interest rates. If you have an adjustable rate mortgage, you might want to look at converting to a fixed-rate mortgage to lock in a relatively low interest rate and to fix the amount of your mortgage payment.
- Consider selling your current home and purchasing a smaller one.
If you own a larger home than you need with significant equity, you might want to sell that home to lock in the gains and then purchase a smaller one. When selling your principal residence, the basic tax rule is that you can exclude gains of up to $250,000 if you are a single taxpayer and $500,000 if you are a married taxpayer filing jointly, provided the home was your primary residence in at least two of the preceding five years. This exclusion can be used once every two years. However, first review current housing costs as well as transaction costs.
- Make sure you have adequate homeowners insurance.
Your homeowners insurance policy should be sufficient to completely rebuild and refurnish your home in the event of a disaster. With rapidly increasing housing costs, check your policy limits every year and increase those limits as needed.