Don't Count on Your Equity...

...It's just paper


"When talk turns to housing bubbles, remember: We don't live in one big homogenous area, but many little communities."

"It's very uneven," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University.

"Nationally, home prices nominally haven't fallen in 50 years. That doesn't mean they won't fall in a particular area. Don't be swayed by the national number. Look at what's happening in your area."

Unlike other investments, your house is more than just a place to let your money grow.

Someone buying a home "primarily for investment purposes in 2006 may be disappointed," says Retsinas.

"Housing prices are going to do what they're going to do," says Eric Tyson, author of "Mind Over Money: Your Path to Wealth and Happiness."

"It doesn't matter. It shouldn't make or break your ability to do things, unless you were counting on that equity to do something. It's really a paper thing."

"An investment home is a totally different proposition. This time, you want to look strictly at the dollars and cents. Can you afford to make the loan payments if rates increase? Do you have fixed-rate financing or will you have to try to predict how rate increases could affect your payments?"

"How long have you had the house? Can you make the payments comfortably or are you stretched to the max? Were you able to get a conventional loan or a product that could leave you vulnerable if the value of the property decreases?

Do you have a lot of equity to act as a cushion against possible decreases in value? Can you afford to keep making payments if the house stands empty for a few months or if a tenant gets behind on rent?"

"Investor-prospectors are the ones that will be more susceptible to a drop," says Retsinas.

Guttentag agrees that devaluated home prices could be a real problem for speculators, especially if they are financing a large portion of the purchase price with an adjustable-rate mortgage or an interest-only loan and counting on turning the property fairly quickly. "They're the ones who are going to get hurt, and the lenders who financed them are going to be hurt," he says.

"The more leveraged you are, the worse your position," says Mike Schenk, vice president of economics and statistics for the Credit Union National Association.

'Ric Edelman, a financial planner and author of "The Truth About Money," agrees. "A bubble is irrelevant unless you're selling," he says. "If you can make the monthly payment, who cares what the house is worth?"'

"He compares the situation to owning a car, which almost always goes down in value. But you don't buy it as an investment. Instead, you keep it "because you can afford it, and it's serving," he says."

"Can you afford your mortgage payments? If you're barely making it now and might have trouble if rates went up, you might simply want to refinance to a fixed rate. You may also want to rethink your mortgage if you've got an interest-only or reverse-amortization loan.

Your ability to ride out a bursting bubble or a bad economy "has to do with the mortgage product you're carrying," says Retsinas.'

"With a fixed-rate mortgage, you have some insulation from interest rate increases."

"Recent estimates put one-quarter of all mortgages underwritten last year in the subprime, or riskiest, category. That’s well above the 13 percent average share for the decade through 2005. One in 10 homeowners has zero-to-negative home equity.”

“Mortgage delinquencies ended last year at 4.55 percent, an 18-month high. And subprime delinquencies are pushing 12 percent. Despite historically low borrowing costs, households spent a record amount of after-tax income at year-end to pay required principal and interest payments. In the next two years, about a quarter of all outstanding mortgages, or more than $2 trillion worth, will reset at higher rates."

"Garth Turner thinks that is significant. “The real estate boom is over. You may or may not like that news, but it is now official. I am calling the eight-year-long housing lovefest, finito. Done like dinner. Toast."'

"If you bought when market prices were the highest, leveraged every cent to get into the house, have only been there a short time, and prices are headed south, then you're much more vulnerable. If you have to sell, you may not get what you owe."

"With the cost of a sale, transfer tax, moving expenses, borrowing 90 percent could mean you end up walking away with nothing in your pocket."

"Equity provides a cushion if your home goes down in value. If you bought at $200,000, you've been living in it for a number of years, and it's now worth $300,000 on paper, you've got a little breathing room."

"Are you banking on making money from equity or rent? And if the numbers no longer work, what's your exit strategy?"