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How to Succeed 2006:Real estate forecast
Relief at the pump, but not at home.
November 15, 2005: 9:07 AM EST
By Pat Regnier, MONEY Magazine
Succeed in 2006
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NEW YORK (MONEY Magazine) - If you're feeling richer these days, you probably have your real estate to thank for it. Runaway home values on the coasts and in the Southwest mean more than paper profits; they've also given people huge amounts of equity to borrow against to keep on spending.

There's anecdotal evidence that some markets may be cooling, but there's still plenty of speculation out there.

Lehman Brothers economist Ethan Harris points to the fact that condos are hotter than regular houses in some towns. "You can tear down a small building and build a bigger one and triple the number of condos, but you can't triple the size of land," says Harris. "So it's the land" -- in other words, houses with yards -- "that should be more valuable."

But speculators like condos because the hassle and cost of getting in are lower than for buying a house. In other places, home prices seem to be reaching the limits of what locals can afford. PMI Mortgage Insurance, a company that insures home mortgages against default, calculates that Boston, Long Island, Orange Country and San Diego face fifty-fifty odds of a price drop.

How much should you worry about this?

High energy costs and slower growth should mean milder home price gains at best and maybe even slight declines. But big price drops are generally the result of major shocks, such as the wave of unemployment that hit California in the early 1990s.

"It's tough to see a traditional factor that would create a rapid pullback," says market researcher Nick Buss of PNC Real Estate Finance. Yet Buss concedes that we're sort of in uncharted territory here, with a market that seems to been driven in large measure by truly historic cheap mortgages.

"We've been stuck at low rates for such a long period of time now that it isn't going to take much to get a reaction," Buss says. "When we get to fixed rates of 6.5 percent, it will be noticeable. If we get to 7 percent it will be very noticeable."

At 7 percent, the mortgage on a $350,000 house with 10 percent down would cost a buyer $210 more a month than at today's average rate; that means it will be tougher to sell a house for $350,000.

Rising rates will have an even bigger impact in such markets as California, where the majority of new buyers have been taking out adjustable-rate or interest-only loans. So 2006 looks like a bad year to stretch to buy more house.

But if you have a mortgage you can afford even as rates rise, and you don't plan to move soon, you'll be fine -- home prices don't decline nearly as sharply as stocks do, and in the meantime you have a nice place to live.

33 moves to make in 2006.  Top of page

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