Maintain Your Home's Value During a Slump

The old expression "What goes up must comedown"refers more to the laws of gravity thanto our country's housing market. However, theNational Association of Realtors (NAR) has reportedthat sales of previously owned homes hit an all-timehigh of 7.24 million units in the third quarter of 2005,up 6.5% from 2004. According to BankRate.com,rates on 30-year, conventional fixed-rate mortgagesrose to a 26-month high of 6.72% this fall. In September2003, the rate was 6.47%; a year ago, it was 5.76%.

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Given these record increases, combined with an interestrate that has slowly crept upwards, it's no wonderthat fears of a housing slump, or at least a flattening out,have begun to spread. Whether that happens or not, arecent article in suggests it's a good timefor homeowners to start thinking defensively.

Living Proactively

Economists say the best place to start is by payingoff debt and slowing your spending habits. If a slumpoccurs, or if the main breadwinner of the family is laidoff, you might not be able to sell your home or obtaina home equity loan on reasonable terms. You mighteven want to arrange for a sizable home equity line ofcredit now while terms are still relatively favorable.Just make sure to keep it for an emergency. The articlepoints out that the personal savings rate forAmericans has fallen to a near-record low, just 0.2%of disposable income. The rationale is thathomeowners don't need to save in light ofbooming house prices. But if the housingmarket slumps, it could leave a lotof people out in the cold.Saving more and borrowingless is always a goodstrategy, but it becomesparticularly important if thehousing market slows.

Economists suggest that in adefensive mode it's best to treat thehousing market as a risk rather than anopportunity. In other words, if you're inthe market to sell your home, do so soonerrather than later. Waiting with the hopes thatprices will go even higher could backfire if a slumpoccurs. Similarly, if you're thinking of buying andpossibly moving within the coming year, you mightwant to delay that action, if possible. Forecastersbelieve there could be many motivated sellers cuttingprices next year.

No-slump Theory

There are, however, many economists who believethat the housing market should continue to see healthyexpansion. If there is a slump, they say, it might beconfined to areas of the country that have experiencedthe greatest increase in housing costs.

Are You Missing the Real

Estate Boom?

David Lereah, the NAR's chief economist,says that the record sales of existing homes inNovember 2005 may have been the summit, but hestill expects that sales will remain healthy going forward.In his recent book, (Currency; 2005), Lereah predicts,"Strong growth will boost incomes, mortgagerates will stay reasonable, immigration willfeed housing demand, zoning laws willrestrict construction, and demand for housingfrom baby boomers and their children,the echo generation, will remain strong."

Sharing that sentiment is a report by theBrookings Institution, "Toward a New Metropolis,"which forecasts that by 2030 theUS population will stand at more than 375million, or about 80 million above currentestimates. Consequently, the report projects"a demand for nearly 60 million housing units in thenext 26 years."Looking to history, the Office of FederalHousing Enterprise Oversight (OFHEO) pointsout that in normal times, housing is a slow-growthinvestment. As evidence, OFHEO's single-family houseprice index rose 268% over a 24-year period from1975 through 1999. In the few short years since then,the house price index has risen 47%. But how long itwill continue is anyone's guess.