Time to Change Your Real Estate Strategy

How many times have you seen an article announcing the real estate bubble has burst? While admittedly almost 2 of every 3 homeowners in the United States has been lost home equity there are still many opportunities to profit from the current real estate market. However, taking advantage of the market requires reassessing how we look at our home.

This article is the first of a series that will provide an explanation of the phenomenon of the housing bubble, why it had to burst and perhaps most importantly, how we should now approach housing as the housing market corrects. Rest assured, the long term picture of rising property values will return as it is fundamently still your best and most important investment. However, in the meantime we need to take stock, just as we would any investment, and assess which way to go from here.

Unless you are a professional investor, most people view their home as a place to live and raise their family while paying bills using wages earned in a growing local economy. Perhaps it is time to look at your home for what it really is a commodity. And just as any commodity, whether it is common stock, pork bellies or real estate, it is subject to the same economic principles that will make its price increase one day and fall the next. The only real difference is the amount of time it will take for the housing market to respond to those factors influencing its price.

Just what is it that makes your home have value? The obvious answer is and always will be how many potential buyer's are there for your home. Think about it a little like selling a piece of art. You can sell it for whatever you can get others to pay for it. If the art looks as if it were painted by a 3 year-old, you will not have many buyer's. On the other hand, if the artwork has mass appeal, much like the old Currier and Ives prints used so commonly on classic Christmas cards, then there are more individuals who may be interested in its purchase.

The greater the number of potential buyers the greater the demand there will be for your home. If you are located in a town with a strong local economy, where businesses are expanding and everyone is experiencing an increasing standard of living, there will be greater demand for housing as more job seekers move to the area in an effort to participate in the local prosperity. If you are one of the lucky homeowners in the community, the increasing value of your property is a direct result of its demand. From this example you can easily see that the value of you home has nothing to do with what it cost to build, but rather the number of potential buyers. The greater the scarcity of appropriate housing, the higher the sales price. This is the very reason a home in Lincoln, Nebraska is priced less than a home of comparable size and construction cost in Boston, Massachusetts.

How expensive must house become before no one will buy? Let us look at an example that has existed in numerous communities in California and south Florida. We will use an an example someone who wishes to purchase a home in California. In this market it is quite common to pay in excess of $450,000 for a 1,300 square foot house. If this small house were purchased with the buyer financing 95% of the purchase price ($427,500) using a typical 30-year, 6.125% mortgage, the monthly payment for only principle and interest would be $2,453. Since most mortgage underwriting limits the maximum monthly payment the homeowner may make to 28% of gross income, the buyers combined annual household income must be not less than ($2,453 x 12) / 0.28 or $105,151 excluding taxes and insurance. And just what percentage of households in California have an income this great? Fewer than 10%! This in no way implies there are nott numerous families who wish to live in the area. It is simply that there are few families who are able to qualify for the requisite financing.

The higher the price of housing the fewer the number of individuals who can qualify for financing. Efforts to prop up demand for homes in these higher priced markets has spawned a whole group of mortgage programs designed to permit more individuals to qualify for larger mortgages. These programs range from various adjustable rate mortgages to some that during times of higher interest rates result in payments that are less than the amount required to pay only the interest with the creation of even greater mortgage debt. Many of these programs result in the homeowner gambling on home equity growth through appreciation only without regard to debt retirement. This approach works well when the demand by qualified buyers is greater than the supply of available houses in the market, but what happens when there is either a local economic downturn or an increase in mortgage rates?

As mortgage rates increase there are fewer individuals who can qualify for the mortgage money. As the pool of qualified buyers becomes ever smaller, home owners are forced to reduce the cost of their house in order to sell. Those old enough to remember the days when Jimmy Carter was President may also recall that actions by the Federal Reserve Board during the 1970s caused mortgage money to be loaned at interest rates greater than 14%. During this historical period homeowners quickly discovered that if you sold your house it was usually at a loss. The price of housing was in a virtual freefall simply because the number of individuals who could qualify for a mortgage was so small in relation to the number of houses on the market. Supply had exceeded demand making it a buyers market. Obviously the minor increases recently experienced in mortgage interest are not as severe as the late 1970s, but it does point to the real potential of having to reduce the price of your home if you are living in one of the overheated markets located throughout the country and you want to have any chance of selling.

Okay, so what do you do if you are living in one of these formerly hot markets such as California or south Florida. The answer is really quite simple. TAKE THE MONEY AND RUN! In investment circles the polite wording is profit-taking. However, if you stay in the same market it will require that you re-invest your profits and essentially return to the same financial position as you were when you sold. Therefore, my recommendation is to seriously consider relocating somewhere that housing is more affordable but provides the same or better quality of life. I am not recommending that you move to the middle of the Ozarks, but rather somewhere that you may again find housing that is appreciating. Just as any investor, your intention is to sell high, take your profits and buy low with the reasonable expectation that you will be able to repeat the process.

I would like to introduce you to a little gem you should consider for your next home address. Located within a two hour drive of sandy ocean side beaches and a three hour drive of world class mountain ski resorts this metro area provides all any family could desire -- plus the potential of a solid 7 percent growth on your home value rate as predicted by Veros Real Estate Solutions. This area has moderate climate with little snow each winter. So where is this little gem? Raleigh, North Carolina.

Formerly just another sleepy southern town, Raleigh North Carolina began capturing headlines in the late 1970s. Raleighs tremendous growth has been fueled, in part, by the Research Triangle Park in conjunction with three major research universities: Duke University, NC State University and the University of North Carolina. Raleigh has grown consistently and now rates as a technical and cultural center in the southeast.

The US Census Bureau currently ranks Raleigh North Carolina together with the adjacent city Cary North Carolina the 10th fasting growing metropolitan area in the United States. Forbes magazine has named Raleigh North Carolina the 2nd best place for business and careers. Kiplingers Personal Finance has named the Raleigh-Durham area one of the Seven Cool Cities for Young Professionals. Rated the 3rd most educated city in the country by the US Census Bureau, Raleigh provides a wealth of talent creating what Entrepreneur magazine has called 3rd Hottest City for Entrepreneurs.

Check Raleigh, North Carolina out. Look at how much your housing dollar will buy where the advantages are many and housing is still affordable. The local multiple listing service can be accessed through a number of real estate agencies serving the Raleigh regional area -- where you can discover how taking the money and running to Raleigh, North Carolina could be the smartest move you will ever make.

Tim Butler is responsible for relocation with Hallmark Real Estate. To view all home listings in the in the multiple listing service (MLS) for Raleigh, North Carolina see http://www.HallmarkRealEstate.com

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