Surviving a Housing Bust

Returning to the highly controversial topic of the housing boom and potential bust in some areas, as in all good conscience I simply must, yea must, we find a very good article on the housing price situation and what to do about it, from bankrate.com by way of Yahoo! finance. The article points out that certain areas of the country really are in line for price corrections, then it gives several good tips about how to weather any changes:

Whenever you're upside down on a car because you owe more than it is worth, the cure-all is to literally drive your way out of it by keeping the car until the loan balance falls below the market value. Be prepared to do the same with a new-home purchase. If your feeling is that you're going to move in three years, it is time to make plans for other contingencies. Can you afford a mortgage that offers a fixed rate for a longer period, such as a 10/1 ARM or a 30-year fixed-rate mortgage? If not, continue renting. The transaction costs of buying and selling are steep, and any downturn in price over such a short holding period will clobber the unsuspecting buyer.

The home is first and foremost where you live. Get past the "my home is an investment" mentality to protect against the bursting bubble. The home is indeed an investment, but a long-term investment.

I think that the idea of paying off principle as quickly as possible is vitally important. If, when you find that you must or strongly wish to sell your house, the rise in value turns out to be less than you might have hoped, you will benefit greatly by having real equity built up. Shorter terms, such as ten or fifteen years, are much better than longer ones, as you pay the financing institution much less in interest, which means that more of your money is going into buying the house instead of renting money. In addition, stay away from adjustable rate mortgates, as the article warns (in contradiction to Fed chairman Alan Greenspan's advice), as they cause you to have to pay the most when the value of your house is rising most slowly or declining

Some people can make a nice profit by buying a scrotty house, fixing it up, and selling it at a profit, but that is not the same as riding value waves. The former is real investment, whereas the latter is speculation. One can succeed at the latter, but it is dependent more on luck than on skill. A real investment is one that a person puts work into.