Many are bemoaning the fact that their home has lost value in the last three years. They purchased the home in the early 2000s and saw some nice increase for a few years. Then the housing market flattened and even turned downward. Then it kept going down, and down, and down. It has not stopped for many homeowners in many markets. Folks are wondering if real estate prices will ever go back up.
Take heart. They will rise again. If inflation is a reality, which it almost certainly will be, then along with everything else, home prices will rise too.
But the key is to make wise decisions based on today’s economic realities. This is a principle I’ve written about before, but it’s worth repeating for my Zillow.com readers.
The premise here is that when the [free] market corrects in one category, as it has in the housing market, it usually creates a few opportunities in other areas of the market at the same time.
Inflation, for example, is very low right now. Potentially even negative depending on where you are. This gives many households the unique opportunity to spend a little less on groceries and vacations. This has been true for our family these past two years.
Combine the inflation numbers with what is happening in the stock market. Prices in the stock market are low relative to the recent past creating a good opportunity for making investments with some of the “low-inflation” generated savings.
The clearest example I can give though is in the housing market. A very close connection exists between the drop in housing values and the drop in interest rates. If the housing market had not dropped as much as it has, we would almost certainly not have interest rates as low as they are right now.
If you purchased your home five years ago for $300,000, and today it’s worth $200,000, then you’ve lost $100,000 in equity.
But if you refinance your 5.75% 30-year mortgage (which has 25 years remaining on it) to a (near 4%) 15-year fixed loan, your payment increases just a little bit, but you cut 10 years (or 120 payments) from your loan term. In this example, the total savings is upwards of $150,000 (120 payments of $1260 per month).
The market takes care of the wise and requires very little intervention to do so. Refinancing for a shorter term mortgage is the best way to get back the money you lost in your home’s value – and then some.