The Pressure of Rising Housing Costs

You saw it coming, I saw it coming, we all saw it coming! The fallout from the real estate frenzy is in full effect. It started with the realization that home prices are halting and “for sale” signs are sitting in the lawn for a longer period of time. Now, those 2/1 and 3/1 ARMS that so many people bought on their home are starting to adjust, and their adjusting UP, UP AND AWAY! Their adjusting so far up that people don’t know what to do, and they may lose their home. If you are savvy at buying foreclosures and have the liquid capital to do it, you’ll probably get a steal on real estate in the coming year or two.

The lesson that can be learned from the investigations going on about sub prime lenders and the stresses that people are feeling from their adjustable rate mortgages is that we CANNOT be so easily persuaded during the peaks and valleys of any market whether it’s the real estate market or the stock market. If you make rash decisions during the highs or the lows, the consequences will play out in the future.

The consequences of getting caught up in the real estate frenzy are mortgage payments rising to $400 – $800 more per month and HELOC’s lingering in the background to pay for housing upgrades that aren’t measuring up financially because the market has hit a plateau. In the same way, investors that try to time the peaks and valleys of the stock market get burned by missing out on scores of good stock growth. What can we do to keep ourselves from getting caught up in the frenzy?

The only answer to that question is to take a deep breathe and think clearly! You don’t have to sell your house just because the market is so great. You don’t have to get a HELOC just to upgrade your house so it will sell for more money. You don’t have to yank all of your stocks out of the stock market because of one bad week. Make improvements to your home because you have pride of ownership and you want to protect your investment. Sell stocks because you want to buy a fund that has a better track record on investment returns.

If you run with the bulls during a real estate boom, you may get caught up in a mortgage that you can’t afford and before you know it, you’ll be doing whatever you can to dump the home. Realize that you don’t have to get desperate right away. Your first option is to look into refinancing your home. If you plan on staying in that home for longer than 5 years, then take the hit from the mortgage points and prepaid interest. Your refinance will pay for itself in the long run if you get into a low interest 15 or 30 year fixed rate mortgage. If you can’t get a refinanced mortgage, then try to sell your home for a bargain. Put it about 10 – 15% lower than the market value. Get the landscaping looking perfect and get rid of the clutter in your house to make it look bigger on the inside. Don’t start thinking that foreclosure is your only option. It doesn’t have to be an option unless you let it be! If you are close to getting foreclosed on, please go see a financial counselor or financial planner first. It’s never too late!

  • Jacquelyn Hart-McCoy

    I feel blessed to have bought my place in 2003 when things weren’t so crazy, however Shawn and I are really wanting to purchase a new house before we start having children in the next couple years. With the housing market so crazy and unpredictable right now, we worry about what a new home will cost and what we will be able to sell our town home for. My plan was to try and save a 50% down payment for our next home so our payments can stay reasonable. I am aggressively saving toward that goal now. Some people have said this is wise and others have said it is foolish…I am just curious what you think? I am still investing in my retirement funds as I aggressively save all other money in a 5.23% yielding savings account. Shawn and I are still maxing out our IRA’s and I am still contributing 10% to my 401k (Shawn has a pension plan.) Some say I shouldn’t be wasting my time with trying to save this huge down payment and I should be investing that money instead. What do you think? Without the down payment, we will not be able to move for over 10 years!

  • erik.folgate

    Hey Jacque,

    That’s a very good question! First off, you guys are investing fiends for your age! You’re doing really well, and I congratulate you for that. You guys are gonna have so much stinkin’ money when you’re 60, you won’t even believe it!

    This is obviously a decision that you and Shawn ultimately need to make. I would say that since you guys are young, you can tone down the investing a little bit to keep your goal of getting a 50% down payment. Honestly, I would NEVER discourage someone from attaining a goal of gaining a down payment like that. Think of it this way, if you spend the next 3 years getting a fat down payment, but you sacrifice investing it in retirement funds, you can always catch up later when you have a MUCH smaller mortgage payment than most of your peers do!

    I would say, go for the big down payment! You sound diligent about investing, and most of it is a mental thing, so you’ll catch up EASILY. It’s those of us who have a hard time saving for retirement that might not benefit from waiting until we’re 35 to start investing in IRAs.

    Good Luck, and let me know how it goes!

  • Jacquelyn Hart-McCoy

    Thanks Erik. I just wanted to get another opinion from someone I trust. It seems to help to get many points of view. Thanks.
    Jacquelyn Hart-McCoy