Protect Your Home Equity and Wealth

Five years ago, while everyone in the world seemed to be rushing out to buy the next big McMansion, I warned about a bust in housing sales, and it happened. I warned about a downturn in housing prices, and that happened next. I warned about the corruption, shenanigans, and above all, the risks in the wildest mortgage lending in history.
Fast forward to today, and I’m happy to say, that more people are listening. Instead of just a few folks around the office, my market analyses regularly go out to millions of television viewers and tens of millions of newspaper and Internet readers.
Today, one of the gravest threats to your wealth stems from the continued housing bust in America. Yes, even though the big bubble has long since burst, the real estate environment continues to ravage the wealth of average Americans.
So, don’t put your head in the sand just yet. Take a few minutes to consider several steps that are designed to protect your home equity and wealth. All the suggestions may not apply to your situation today, but the information will help you navigate the environment on into the future.
Protect your home. If you own your own home, it’s your primary residence, and you’re not in over your head with a big mortgage, your best bet may be to stay put. You have the flexibility to ride out the downturn, even if it lasts a while. But, recognize that you may lose a chunk of your home equity before any recovery sets in. If you can hold out long enough, your home may actually regain at least a portion of its heyday value.
Consider renting if it’s right for you. If you’re not tied down by family considerations, compare the costs. In many places, renting is cheaper than buying or owning even after the tax deduction you get for mortgage interest. And, don’t forget to factor in the cost of upkeep, mortgage interest, property insurance, property taxes and everything else that home ownership entails.
If you buy a home, be careful. Don’t get bamboozled into a high loan-to-value (LTV) mortgage. Most banks aren’t even offering them, but if you’re faced with what seems like a seductive option, think twice and let it pass. The market hasn’t fully stabilized, and any downturn will push you into a situation where you’ll owe more than your home is worth. If you change jobs or have to move for any other reason, you’re going to have trouble recouping your investment. You might even have to pay money at closing just to unload your house.
Sell residential real estate properties purchased as investments — especially condos. Many investors are “cash flow negative.” They can’t rent their properties for enough to cover the monthly mortgage and maintenance payments. They’re losing money. And now that the prospect of big price appreciation is gone, what are they going to do? They’re going to sell for whatever they can get or they’re going to have to give the keys back to the bank. As inventory floods the market, you’re going to see fire sales. And it’s likely not going to turnaround any time soon. Sell.
If you’re still holding mortgage bonds — especially pools of high-risk subprime mortgages — sell. The value of those bonds are down and as banks ultimately take the bull by the horns, foreclosing on many delinquent borrowers that have gone for more than a year without paying, the value of those pools will fall even further. Also, no matter how well they may have done in the past, avoid so-called mortgage REITs, investment firms that have been cobbled together in recent years to invest in mortgages and mortgage backed securities.
Remember, real estate downturns can last a long time, as this one already has, without real recovery in sight. This is not the time to leave yourself exposed. But it is a great time to prepare.
To most of Wall Street, the housing bust was a shock. But Safe Money subscribers were first warned about the impending crisis more than five years before it happened. Be smart and safe, check out Safe Money Report.
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money, Interest Rates Profits and LEAPS Options Alert. He is often quoted by the New York Sun, Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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