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Business
Housing prices: Should you be worried?
By CONSTANCE L. WOODS
Financial Consultant
As a homeowner or resi
dential real estate investor,
you may have a high per
centage of vour net worth
invested in your home or
other properties. It so, vou
are no doubrt tollowing news
reports of escalating LS.
home prices. Should vou be
worried about a bubble?
To be sure, todavs real
estate market is anvthing but
typical: the Othice ot Federal
Housing Enterprise Over
sight reports that the average
U.S. home increased in value
by 13.4 percent between the
second quarters ot 2004 and
2405, Even the average
increase doesnt tell the tull
story. In Nevada, homes
appreciated by 28.1 percent.
jn . California, prices
increased by about 25 per
cent.
What a bubble is — and isn't
As property prices contin
ue to move higher. some
economists and other
observers are voicing con
cerns about price bubbles
and the risk that prices in
some markets might drop
substandially. It the drops are
significant and widespread.
the impact could spread
beyond home prices and
potentially slow the U.S.
economy.
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ror: Chail it reasures
i o -
Detinitions ot a housing
market bubble vary, but the
Federal Deposit Insurance
Corporations perspective is
often used. According to the
FDIC, a local real estate mar
ket is considered a “boom”
market when prices have
appreciated by at least 30
percent in the previous three
vears. According to the
FDIC. 55 of the 362 US.
metropolitan markets met
this detiniton in 2004, and
those boom markets com
prise 40 percent ot the value
ot restdenual real estate in
the U.S.
Property prices rarely drop
suddenly - ic ovpically takes a
combination ot both supply
and demand-related tactors
to reverse an upward wend.
Here are some factors to
keep in mind it vou're con
cerned that vour local mar
ket 1s overheated:
[)cu]illc\ I\(‘('\i x.ll.ll\‘sl\
[he past tew decades have
shown that e takes a signifi
cant economic event to
reverse strong housing mar
kets. For example, Southern
Calitornias pliu‘ declines in
the carlv 1990 s were exacer
bated by job losses in the
defense industry and a
national recession. But when
that areas technology indus
try slowed recenty, property
prices continued to increase
based on sustained demand
from homeowners and
Investors.
Prices can soften without
plummeting
The Australian real estate
market experienced a string
of double-digit price increas
es in the early 2000 s, as real
estate became the investment
ot popular choice. The coun
try's central bank responded
by raising interest rates — as
our own Federal Reserve
Board has done — and the
state of New South Wales
imposed a transfer tax on the
sale of investment properties
in a bid to dampen property
speculation. These efforts
popped the bubble but didn't
cause a crash. Home-prices
have been largely unchanged
tor the past vear, although
some major cities have seen
slight - declines. Property
owners who cannot receive
their asking price are pulling
properties from the market,
leading to a reduced supply
even as demand falls.
Choosing Your Mortgage
Your mortgage plays a role
in the loss exposure it your
property’s value declines.
Fach mortgage type has a
unique set of advantages and
risks, and your specific cir
cumstances and needs will
(l(’[C”"inC \\'hiCh m()r(gag(‘
works best tor vou.
It you own property in a
boom market and are con
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AUGUSTA FOCUS
cerned about potential soft
ness, however, you should
consider a loan that requires
regular principal payments.
The logic: If you finance a
property with an interest-only
or negative amortization loan
and subsequently need to sell
during a market decline, you'll
face a loss that may require an
outlay of cash. In contrast, if
you had been making princi
pal payments during the life
of the loan, you would have
reduced the loan’s balance and
softened the losss impact. The
economic results will be essen
tally the same in either sce
nario, but periodic principal
payments reduce the cash
flow impact of selling at a loss.
Looking Ahead
Real estate investors and
homeowners who live in
boom markets and plan to sell
their properties within the
next five years should monitor
their local markets closely for
signs of softening. But it you
plan to hold your property for
the medium or long term, the
media’s obsession with nation
al property bubbles shouldnt
be a cause for concern. Real
estate prices move in long
term cycles, and property
owners whose mortgages fit
their financial circumstances
will be in a good position o
sit tight through the cvdes.
Intormation is power. If
youre concerned .iixun your
exposure 1o a potential real
estate bubble, consult vour
advisors to discuss the options
available to you.
Constance Woods 1s a Finan
ctal Consultant with [Smith
Barney. For more information,
contact Constance L. Woods at
(706) 823-8144 or con
stance. L. woods@smithbarney.c
Serving the
investment needs of
the community.
Y 4 \
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Constance L. Woods
Financial Planning Specialist
Financial Consutant
Investmaent Management Specialist
Retirement Plan Consultant
One Tenth Street Sutte 600
Augusta Ga 30901
www 'C smihbarney comwoods
THIS IS WHO WE ARE. THIS IS HOW WE EARN IT.”
SMITH B\RNEYH,
TOO 4 (mgrouy Globsl Markee e AN nghts meecved Mewber BPC Sewth Barney i ¢ Svismn and service mert of Cibgrous
Ghote! Markats ww el M 3 Wiy e s Übed 81 e led Broughoet the work CITIGROUP and B Usbreils Duvecs are
e many end service marks of tewp o i @TReies and are waed and regiviered Wroughena e werd
December 1, 2005
om. Website :
htp:/lwww. fc.smithbarney.co
m/woods Smith Barney does
not provide tax or legal advice.
Please consult your tax and/or
legal advisor for such guid
ance.
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