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| The Basics | 5 risky real estate moves to avoid now
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There's no crystal ball when it comes to the real estate market. Don't make yourself more vulnerable by getting into risky loans, dicey rental properties or other perilous positions.
By Liz Pulliam Weston
Overconfidence can be an investor's most deadly flaw. Yet many people are displaying plenty of overconfidence when it comes to real estate.
They're sure home prices can only go up -- or that values will crash tomorrow. They're committing to risky loans and not thinking about how they're going to make the much-higher payments to come. They're gambling their current wealth on future, speculative returns without truly understanding the risks.
"I'm nervous," said financial planner Delia Fernandez of Los Alamitos, Calif., who says she sees plenty of clients act as if they have a crystal ball. "We know we can't sustain this growth rate but nobody knows what the future holds."
If you're considering any of the following risky real estate moves, you might want to think again.
Risk: Timing the market -- with your home
Some pretty smart people are seeing real estate bubbles, and a few are backing up their intuition by selling their homes now in hopes of buying again later at bargain prices. Doug Duncan, chief economist for the Mortgage Bankers Association, and Dean Baker, the director of the Center for Economic and Policy Research, are among those taking their profits to the sidelines in anticipation of the bubble popping.
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Should you follow suit? Probably not. There are plenty of problems with the concept of "shorting the market" by selling your home. For instance:- Prices may not crash. While double-digit home-price increases aren't sustainable for the long term, your particular housing market could well experience slower growth rather than an actual decline. That means you could be priced out of your desired neighborhood or wind up paying a lot more for a similar house.
- Bubbles tend to persist. Even if there is a crash, it may not happen for years. Remember, there was a three-year gap between Alan Greenspan's infamous "irrational exuberance" comment and the actual bear market in stocks.
- The cost of pursuing your hunch is high. Selling your home will cost you about 6% in real estate commissions, plus the expense of moving. When you eventually buy your replacement house, you'll face closing costs and possibly higher interest rates on your new mortgage. In the meantime, you'll be paying rent to some landlord -- perhaps for years. That could eat up a lot of the profits you're trying to protect.
- You may freeze. Some people who've sold their homes assume they will boldly swoop in to buy other people's foreclosures when the crash comes. (That's what Duncan did during Washington, D.C.'s, last slump in the early 1990s.) But a declining real estate market is a frightening thing, and many find themselves paralyzed on the sidelines, unwilling to buy with prices still sliding.
If you're intent on timing the market, at least consider waiting until your area shows some signs of weakness, such as prices actually falling in the higher-end ZIP codes.
"Prices in real estate don't come down overnight like the stock market," said economist Delores Conway, director of the Casden Real Estate Economics Forecast for USC Lusk Center for Real Estate and a veteran of the Los Angeles market crash of the early 1990s. "If (real estate values) come down, they come down gradually."
Risk: Stretching to buy a home with risky loans
It's one thing to take on a big mortgage if your payment is fixed for 30 years, since inflation will eventually ease the strain of making your monthly nut. It's quite another to stretch using a loan that can explode in your face if you hang onto it long enough.
Interest-only and "flexible payment" or "option" mortgages typically give you the choice of making relatively small initial payments. Interest-only loans don't require principal payments in the early years, while flexible payment loans typically give you four options each month: an interest-only payment, a regular payment, a regular payment plus an additional principal payment or making no payment at all.
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MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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