Double-Digit Home Price Drops Not Out of the Question

Over the next few years, more than three-quarters of the nation's housing markets will suffer some decline in home prices.  Many will experience double-digit hits in a forecast that has worsened considerably in recent months.

According to an analysis conducted by Moody's Economy.com, declines will exceed 10 percent in 86 of the 379 largest housing markets.  And 290 of the cities will experience price drops of 1 percent or more.

The survey attempted to identify the high and low points of housing prices in each of the markets, some of which started declining from their peak in the third quarter of 2005.  All are median prices for single-family houses.

Nationally, Moody's is projecting an average price decline of 7.7 percent.  That's a jump from the 6.6 percent total price drop that the company was forecasting in June and more than twice that of last October's forecast of a 3.6 percent price decrease.

So if you're thinking of buying a home, does this mean it's smarter to wait until prices drop further?

Our opinion is, NO!  An increase of only 1 percent in the mortgage rate can more than offset any savings you might realize by waiting.  In the case of "gambling on interest rates".. waiting for home prices to drop could end up costing you more than you'd save.

Home Foreclosures Continue to Surge

New foreclosure activity continued to surge in August, rising 36% from July and more than doubling from a year earlier.

The jump in foreclosure filings [in August] might be the beginning of the next wave of increased foreclosure activity, as a large number of subprime adjustable rate loans are beginning to reset now.

Another significant factor in the increased level of foreclosure activity is that the number of REO filings [bank repossessions] is increasing dramatically, which means a greater percentage of homes entering foreclosure are going back to the banks.

Floods Are Not Covered

Most people know this, or at least SHOULD, but for some reason, always think, "Oh, we're not in a flood zone, so we're in no danger of flooding.. why buy flood insurance?"

Floods, aren't covered under homeowners insurance policies — something many Katrina victims learned to their chagrin.  The National Flood Insurance Program, run by the Federal Emergency Management Agency, offers coverage.  If you live in an area that's prone to either floods or hurricanes, you need both wind and flood coverage.

It seems that not a week goes by any more that we don't hear news about floods from heavy rains in areas that have never flooded before, or at least not in a very long time. 

So don't be negligent or niave in thinking "flooding will never happen to us.. we're not in a flood zone."  Neither were millions of Americans who have sustained some sort of flood related damage to their homes recently, and had no coverage for the damage.

If you're the victim of a landslide, however, you're pretty much on your own.  That kind of earth movement usually isn't covered, so it pays to get a geologist's report before buying any home near a cliff or on a hill.

Have you experienced flood or water damage that was not included on your homeowner insurance policy?  We'd love to hear from you.  Leave us your comment below.

Don't Bite Off More Than You Can Chew

Your accountant might advise you to take out as large a mortgage as possible because the interest is tax-deductible.  However, even though it's deductible, mortgage interest still has to be paid, and payments on a large mortgage could leave you short of cash that you'll need for other things.  You could even lose your house if you suffer a financial setback or emergency and find yourself unable to make the steeper mortgage payments, just because that interest is deductible.

Some people take out extra mortgage money and plan to save or invest it elsewhere, but the interest paid on a mortgage is usually greater than what you could earn on personal savings, a gap that can eat up most of, or all of the mortgage's deductibility advantage.  And it's not worth risking a bigger mortgage in the hopes of using the borrowed money to earn more elsewhere.

And be careful of falling into the old "pay off the credit cards with the extra money" trap.  Unless you are completely disciplined NOT to use those cards and run up the debt again, you could lose your house when the credit card bills can't be paid because you took out that bigger mortgage.

Only bite off what you can easily chew and don't let an accountant put you at risk of losing your house later!

Retiring in St.Louis With a Mortgage

It's an increasingly common dilemma.  You want to retire — but you haven't yet retired your mortgage.

According to the Federal Reserve, among households headed by someone age 65 to 74, over 32% had a mortgage on their primary residence in 2004, up from less than 19% in 1992.

Going into retirement and still carrying a mortgage?  Here's how to do it:

• If you have a heap of savings and a modest mortgage, go for the loan payoff.  You might consider trading down to a smaller home or, work part time until you're rid of the mortgage.
• If you have cash sitting in, say, a money-market fund held in a regular taxable account, also consider using these savings to reduce your loan balance.  Sure, your mortgage may be costing you just 6% and the interest might be tax-deductible. But your money-market fund is likely yielding only 5% — and you have to pay tax on that income.

If your mortgage is so large that paying it off will seriously crimp your retirement, you might as well get the mortgage payment down as low as possible.

Better still, trade down.  After forking over a 5% or 6% real-estate commission and paying off your current mortgage, in most cases, you could put down cash on your new home, leaving you with a smaller mortgage.  If you financed that over 30 years at 6.5%, your monthly payment would be lower.

You might even refinance later in retirement, further shrinking your monthly payment by again extending the loan over 30 years.  Even in today's tight credit environment, you shouldn't have a problem qualifying for a new loan, as long as you have a reasonable amount of retirement income.