We have found a new form of cheap entertainment.
We spend our weekends perusing the real estate section of the paper and checking the MLS site. On Sunday afternoons, with Mapquest directions in hand, we drive around looking for possible properties. Except for the price of gas, it’s a pretty inexpensive way to wile away a weekend.
After five years in our home, we’re itching for a change. Maybe it’s the empty-nest thing kicking in. Maybe it’s the idea of cashing in on our investment. Maybe it’s the low interest rates. Could be we just like the idea of a change?
Regardless, we have the itch, and we’re trying to be sensible about the scratching part.
‘Tis the season
As every good real estate agent knows, spring and summer are the seasons when buyers come out of hibernation and start looking for new homes. The last few years have been boom ones for the real estate market, and the Jackson area is no exception. The weather gets warm. The grass turns green. And people start swapping houses. In fact, there’s a house on our street that goes on the market every spring.
As we’ve driven through developments like Reunion and Lake Caroline, we’ve been amazed at the number of young families living there. They’re walking. They’re jogging. They’re pushing strollers. And I wonder… where do these young people get the money for the expensive houses they’re buying?
We have a 15-year mortgage on our house, and we’ve just reached the point where the amount paid in principal is greater than the amount we pay on interest each month. I just love seeing that debt dropping. I understand that most young families can’t afford to have a 15-year mortgage. Most are opting for a 30-year loan, but, now, I’m hearing about 50-year mortgages. I’m also hearing about interest-only mortgages and other such alternative forms of financing.
Scary, scary, scary!
Meanwhile, we watch the same houses on the MLS site. Over the last several months, there has been little change. We notice a rise in the inventory of houses of all types, but, particularly, of the high-dollar variety. We note the substantial reductions in asking prices on many of those listed. While I read about the cooling of the housing markets in places like Florida and Arizona, I see it in the Jackson area.
vHouses are still changing hands, but it’s taking longer. Buyers are finding an increase in the competition. Economics 101 teaches us that an increase in supply without an accompanying increase in demand leads to lower prices.
Combine alternative financing with lower prices, and you’re liable to find yourself upside down. That means you owe more on the house than what it’s worth. Instead of selling your house and walking away with a pile of cash, you have to dip into your retirement plan to pay off the loan.
It’s not fun, and it’s happening all over the country.
Texas leads in the number of total defaults, while Colorado is the leader on a per capita basis. Many of those young families who rushed into home ownership in a big way are finding themselves unable to make the payments and unable to sell their home. The result can be disastrous. Left with no home and a ruined credit record, it could take years to recoup.
How do you avoid such a mess?
Limit your overall debt. Take a haircut on whatever the lenders say they’ll give you. If the banker says he can loan you $200,000, take a loan for $150,000 or less. Don’t bump up against your maximum in these uncertain times. A change in the values in your area, a change in your employment or a change in the overall economy could put you under.
Try not to want so much. After all, how much house do you really need? Stop looking at your neighbors and thinking you have to keep up. Trust me. They’re probably way in over their heads. You don’t want to go there.
Don’t get caught up in the frenzy on any investment. Just because real estate was hot last year doesn’t mean it will be hot this year.
And the value of your home is a fuzzy thing. You only really know what it’s worth when someone shows up on your doorstep, check in hand. You may think your home is worth $350,000, but if nobody shows up to buy it, it’s not.
When interest rates are still at historically low levels, stay away from ARMs, very long-term financing and interest-only financing. If you can’t afford the house using a traditional fixed-rate loan, you can’t afford the house.
Put the pen down, and walk away.
The last one is for me. Try to be content where you are. Don’t change for the sake of change. When you decide to swap houses, make sure it’s a financially sound decision, as well as one that will make you happy to go home.
For now, we’re still looking, still itching. Most Sunday evenings, we go home and are grateful for a good home and a wonderful neighborhood. We’ll still entertain ourselves with the real estate section, but I don’t know if we’ll ever scratch.
Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton. Her e-mail address is firstname.lastname@example.org, and she’s online at www.newper.com.