Time to Change Your Real Estate Strategy
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 will attempt to explain the phenomenon of the housing bubble, why it had to occur and finally how housing should be approached as the market corrects itself. Keep in mind that despite all the negative press over the past months looking at the value of real estate over the long term is fundamentally sound. In the meantime; however, it is time to take stock and determine what your best strategy will be to capitalize on the value of your home.
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.
Just what is it that makes your home have value? The obvious answer is and always will be how many potential buyer's are there for your home. Think about it a little like selling a piece of art. You can sell it for whatever you can get others to pay for it. If the art looks as if it were painted by a 3 year-old, you will not have many buyer's. On the other hand, if the artwork has mass appeal, much like the old Currier and Ives prints used so commonly on classic Christmas cards, then there are more individuals who may be interested in its purchase.
The greater the number of potential buyers the greater the demand there will be for your home. If you are located in a town with a strong local economy, where businesses are expanding and everyone is experiencing an increasing standard of living, there will be greater demand for housing as more job seekers move to the area in an effort to participate in the local prosperity. If you are one of the lucky homeowners in the community, the increasing value of your property is a direct result of its demand. From this example you can easily see that the value of you home has nothing to do with what it cost to build, but rather the number of potential buyers. The greater the scarcity of appropriate housing, the higher the sales price. This is the very reason a home in Lincoln, Nebraska is priced less than a home of comparable size and construction cost in Boston, Massachusetts.
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.
Okay, so what do you do if you are living in one of these formerly hot markets such as California or south Florida. The answer is really quite simple. TAKE THE MONEY AND RUN! In investment circles the polite wording is profit-taking. However, if you stay in the same market it will require that you re-invest your profits and essentially return to the same financial position as you were when you sold. Therefore, my recommendation is to seriously consider relocating somewhere that housing is more affordable but provides the same or better quality of life. I am not recommending that you move to the middle of the Ozarks, but rather somewhere that you may again find housing that is appreciating. Just as any investor, your intention is to sell high, take your profits and buy low with the reasonable expectation that you will be able to repeat the process.
Let me introduce you to a little gem that you need to consider for your next home address. Located within a two hour drive of the coast and a three hour drive from the mountains this metro area provides most of what most families are looking for plus the reasonable expectation of a solid 7 percent rate of appreciation as predicted by Veros Real Estate Solutions. This area boasts a moderate climate with little snow each winter. So where is this gem? Raleigh, North Carolina.
Formerly just another sleepy southern town, Raleigh North Carolina began capturing headlines in the late 1970s. Raleighs tremendous growth has been 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 southeast.
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. See for yourself how much your housing dollar will buy in a great location where housing is still affordable. The local multiple listing service can be accessed through a number of real estate agencies serving the Raleigh and Research Triangle Park area -- where you can discover how taking the money and running to Raleigh, North Carolina could be the smartest move you will ever make.
About The Author
Tim Butler is responsible for relocation with Hallmark Real Estate. To view all home listings in the in the multiple listing service (MLS) for Raleigh, North Carolina see www.HallmarkRealEstate.com .