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| Hot and cold home markets
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| These real estate markets are the extremes: the fastest growing and the slowest. (Full story)
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| Ellen McGirt of MONEY Magazine talks about how to take care of your finances when a disaster strikes. (September 20) |
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NEW YORK (CNN/Money) -
The housing market's future is always a little hazy, even with oracles like Alan Greenspan gazing into the crystal ball.
But the latest Federal Reserve rate hike has government-chartered lender Freddie Mac saying that the market should lose some strength and mortgage rates should rise going into 2006.
So how can homeowners protect themselves from debt exposure and retain the most value from their investment, whether real estate comes in for a soft landing or goes belly up?
Fix your rate
"If you have a variable rate mortgage, now is the time to refinance and lock in a fixed rate to protect yourself in the long run," said Gary Ambrose, a director at Personal Capital, Inc., a unit of National Financial Partners, recommending that homeowners lock in a rate for at least 25 years.
Such a move may hurt in the short term, since it will likely result in a higher payment now, but it can protect you from crushing payments in the future as rates rise unpredictably.
"The affordability issue becomes very real when mortgage rates rise because a lot of people have taken out interest only loans or adjustable rate mortgages thinking that rates would stay low," said Brian McQuade, with Columbia Financial Advisors.
Just how many people have taken out interest only loans? According to SMR Research Corp, more that 25 percent of loans were interest only in the first half of 2005, up from 15 percent for all of 2004.
And while there is still debate over whether the central bank will put the brakes on its monetary tightening campaign, many economists and bond traders see three more quarter-point rate increases by the middle of next year. They also say that long-bond yields and mortgage rates will rise when they capitulate to rising overnight lending rates.
Downsize and diversify
Maybe you've been thinking about a smaller house now that the kids are gone. Or you've fixed up the investment property and have been contemplating a sale.
If you're planning on downsizing anyway, do it now, said Ambrose.
"Prices are high now, and at the very least price appreciation is going to slow down," he said. And after you downsize, you not only reap home equity gains. You're likely to save on property taxes, utility bills, insurance and other upkeep costs.
Several financial planners said it would be smart to use the cash your real estate has created to diversify into more traditional investments.
"We're going to see a lot of the money that has been parked in real estate move back to stocks," said McQuade. "Wealth should not be centered in your residential real estate, which is going to return to more stable to flat appreciation."
The exception: if your home is on one of the coasts, where real estate values tend to stay buoyant because it is generally considered desirable to live or rent by the sea.
So get the real estate portion of your portfolio in order. If it comprises the bulk of your investments, it's time to look into other ways to make your money grow.
Now may also be the time to rebuild your household savings, given that the savings rate in the U.S. is at less than 1 percent, the lowest since the Commerce Department started tracking it in 1947.
Your house is not an ATM
Now is also the time to stop leveraging our homes so we can continue to spend.
"People have to minimize the use of home equity for short term financial needs," said Ambrose. "Get your budget in order. Home equity lines of credit are for long-term financial needs. They were not meant to buy cars and trips and fuel overspending."
In 2005, the average American had made about $20,000 in home equity gains from price appreciation alone, according to the National Association of Realtors. But NAR senior economist Lawrence Yun says that rate of appreciation is due to slow.
"We've been in a period when a lot of equity has been dropped in our laps, and it has been fairly easy to get to that equity in tax favorable ways. In these circumstances, savings will fall given the strong consumer attitude in America," said David Seiders, chief economist with the National Association of Homebuilders.
Steve Bohlin, managing director at Thornburg Investment Management, compared the abuse of home equity to the wealth effect of the late 1990s. "People are spending more than they normally would on an asset that can fluctuate in value."
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Will crazy loans sink the housing market? Click here for more.
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