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Rates Near Record Lows, Refinance Now
  U.S. Housing Boom is near the End

Home123 By Mike R. Sachs - June 2005

Home Prices Slowing
Home price boost are moderating all over the U.S., according to the Office of Housing Enterprise Oversight. While prices averaged a 7.71 percent increase from the first quarter of 2003 through the first quarter of 2004, the 0.96 percent first-quarter rise is "nearly 3 percentage points lower than the 3.71 percent jump in the fourth quarter of 2003," OFHEO said. Mortgage applications also fell for the fifth straight week in the week ending June 4, down 8.9 percent, according to the Mortgage Bankers Association, a trade group.

Does the Bubble is ending?
There have been regional declines in Boston, California and Houston over the past two decades; is it possible that for most homeowners, real estate is the best long-term purchase? Going back to 1980, in the frothiest markets, prices appreciated most in Massachusetts (up 516 percent), New York (399 percent), Rhode Island (361 percent), and California (315 percent) through March 31, OFHEO reported. You could have done better. Let's say you took a buy-and-hold approach with stocks represented by the Standard & Poor's 500 index of the largest U.S. companies over the same period. With dividends reinvested, your nominal return would have been 1,317 percent, or about 11 percent a year. Although it's unfair to compare large - company stocks to homes - stocks annually average 20 percent variance in prices (standard deviation since 1926 or risk) -- there's typically no 6 percent commission to buy a no-load stock index, no taxes to pay (if held in a tax-deferred account) and certainly no maintenance costs. If owned through a mutual fund, you could pay about 0.20 percent a year to own the stock index.

The Real Estate Risk
Real estate is not a risk free. Like tech stocks in 1998-2000, homes can also be wildly overvalued. A recent study by the Economist magazine of the $50 trillion worldwide property market found that "home prices look seriously overvalued in Australia, Ireland, Netherlands, Spain, the U.K. and U.S." Pam Woodall, economics editor of the British magazine, said at a London conference sponsored by the U.K. research firm Investment Property Databank that ``house prices will fall by at least 20 percent in many economies over the next four years.'' While it's hotly debated whether a dramatic decline is coming for the most inflated markets, the least-discussed risk is that being overleveraged in real estate can negatively crimp your cash flow and financial goals.

The Risk Factor is Increasing
The commonly accepted wisdom that you should buy as much house as you can afford is perhaps the most dangerous residential risk factor. Higher housing debt can push you down. "Americans are spending about a third of their disposable income on housing, twice what they were spending 30 years ago". That means a reduction in cash flow and a sixth less money available to finance retirement and other financial goals. Spurred by low consumer interest rates, the crushing burden of household debt also contributed to 1.6 million personal bankruptcy filings for the year ended March 31. So no real-estate investment is worthwhile if it cripples your cash flow. "One-sixth less disposable income for a family earning $120,000 a year would leave them with $20,000 less in real dollars per year"

Should Homebuyers Worry?
It's a good time to be alert and selling real estate now may be a good idea if you need to take a gain. You can observe renting if moving into a pricey new area. Just don't expect any bargains when buying in torrid markets. In Manhattan, where demand is strong, apartment prices climbed to a record average $998,905 in the first quarter of this year from $903,259 the previous three months. Therefore if you think there's a bubble you should consider selling your property. When the prices will start going down, we can see a massive of selling that will contribute to even larger losses.

The home prices can collapse as the stock market did in 2001-2003, furthermore in real estate it is much harder to get off your position.

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