Unless you currently have your home listed or are thinking of putting it on the market, it may not matter to you that signs of a softer real estate market are quietly seeping into your neighborhood. But it should, because even if you are not moving you ability to refinance or get a home equity loan may be impacted.

Take a look in your neighborhood. Are there more properties for sale than usual? What about the homes that have recently sold? Did they take longer to sell than in the past and if so, what concessions did sellers have to make to attract a buyer and make the sale?

But a softening real estate market is much more than fewer sales. The initial economic crunch starts with individual home owners who:

1. Are late paying their mortgage or miss payments entirely. First hit are owners with mortgage payments high in proportion to their monthly income, especially those with low or no savings to bridge a shortfall if a paycheck is missed or overtime shrinks. In times of economic downturn, many home owners find that they're dangerously one pay check away from foreclosure;

2. Find it tough if not impossible to bring delinquent payments current in order to save the property from foreclosure. As tough as it was to accumulate the down payment and closing costs for the initial home purchase, catching up hundreds if not thousands of dollars within a several-month time period may be impossible for many owners. The evidence then appears---yard signs declaring that HUD and other entities in the secondary market (like Fannie Mae are focused on recycling lender "REOs" (real estate-owned repossessions).

Once lenders find that defaulting loans are growing, they too become strong competition in order to move these non-performing assets off the negative side of their balance sheet into the "performing asset" category. Strong competition with lower interest rates and fewer closing costs attempt to lure what few buyers there are to these properties.

With all the competition in a market turning the focus from seller to buyer, one would think that bargains could abound for the patient, strategizing buyer. Unfortunately, all that glitters might not be gold. Sellers can offer terms too good to be true like low down payments (but high monthly costs), take over mortgage (because the property was bought with little or nothing down the remaining loan balance is worth more than the home), or lease purchase to grow your down payment gradually (but if you miss a payment the property can be reclaimed by the owner under some installment loan agreements).

The bottom line is that debt is still debt, no matter how flashy the terms sound. Low or no equity build-up coupled with first, second, and often third mortgages may tie some seller's hands, making any sale impossible unless the seller brings a check to closing. Of course, if the seller has the cash for a check, in many cases they wouldn't need to sell in the first place.

Prudent home owners and buyers alike know that a market shift is a time to weigh options carefully, not over-extend, and to gather all the facts prior to making any type of move even if it initially appears to be a positive one. Since there is no crystal ball to determine how deep, wide and long a shifting real estate market can be, we must rely on the time-tested strategies that have brought us this far---market trends, information, and a whole lot of common sense.

Published: February 2, 2001

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