Even so, if values decline, but you love
your home, can make the payments, and don't have to
move, you'll be OK, says Jack Guttentag, professor emeritus
of finance at the Wharton School and author of "The
Mortgage Encyclopedia." The ones who really
stand to take a hit: speculators who borrowed as much
as they could and are counting on selling in a very
"It has a lot
to do with the mortgage product you're carrying,"
says Nicolas Retsinas, director of the Joint Center
for Housing Studies at Harvard University. "With
a fixed-rate mortgage, you have some insulation from
interest rate increases." Be careful with adjustable-rate
loans "in what could be a rising rate environment,"
he says, especially if they are "not in sync with
what future earning capacity will be."
Generally speaking, decreasing home values
can hurt you in one of two ways:
- You can't sell the home for what you
paid (meaning it will actually cost you money to sell);
- Falling values come with increasing
interest rates and you can no longer afford to make
the payments. Depending on how far prices have dropped
and how much equity you have, you might not be able
to afford to sell.
"The worst-case scenario is that
you're sitting there with very little equity and an
adjustable rate at the top of the market," says
Schenk. And if you have more than one house, the danger
is multiplied. "The more leveraged you are, the
worse your position."
Equity and the
Equity is a great shock absorber. The more you've built
up, the better shape you're in if prices do start to
drop. For example, if you have a $300,000 home and have
$200,000 in equity, that means you could sell it for
$100,000, plus the selling and moving expenses, and
you wouldn't pony up any money.
So how much equity does it take to insulate
you from a bubble? The more the better. A lot of it
depends on just how fast prices on your home could drop.
The danger zone: less than 15 percent
equity, says Ilyce Glink, author of "50
Simple Steps You Can Take to Sell Your Home Faster and
For More Money in Any Market." Any time you've
tapped 85 percent to 90 percent of your equity, "you're
a little bit at risk," she says.
Ideally, you want enough equity to cover
the drop in value, so that you always have the option
of selling. And you want to build in at least 10 percent
to cover selling costs (real estate commissions, sales
costs, moving expenses, etc.), so that you have a little
margin of error.
Generally speaking, the priciest homes
are the ones that suffer most when a real estate bubble
"In any correction, the people at
the top of the market will be the ones to feel the most
pain," says Schenk. "You always have people
moving down from the top when there's a correction."
Dana Dratch is
a freelance writer based in Atlanta.