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Outlook For Home Prices - Dim

Aug 23, 2008
Investors, don't expect home pricing to increase anytime soon. Recent events indicate that real estate values will stay flat or even decline further.

Why the gloomy forecast? Let me count the reasons:

1. The FHA has banned down-payment grants that have traditionally been paid for by home sellers.. That is a serious blow to owners of lower priced homes. Fewer people will be able to afford those homes. Fewer buyers mean downward pressure on home values.

2. Those having trouble making their mortgage payments may get some relief as provided for in the recently enacted housing bill. The emphasis should be placed on "may get some relief."

Under the bill, some will be able to convert their high interest, adjustable rate loans to a fixed rate mortgage with a lower interest rate. A lower interest rate means lower monthly payments.

As with anything created by Washington, don't get too excited until you read the fine print. In this case, to be eligible to switch mortgages, your payment must now be more than 31% of your income... AND the new loan cannot exceed 90% of your home's current value.

That last requirement is the killer. With the way home prices have been falling few will be able to satisfy that loan to value ratio. Without a new loan they won't be able to stay in their current home and that will result in more homes being offered for sale. More homes + fewer buyers = falling home prices.

3. Fannie Mae is the motor that drives the mortgage market. You've read about Fannie Mae's huge financial losses, right? Well, now that the horse is out of the barn it has dawned on them that they must tighten loan requirements. They have eliminated loans to borrowers who many have solid credit scores, but can't show proof of income or have small or no down payment funds.

(By the way, Daniel Mudd is Fannie Mae's CEO. He takes home $12.2 million a year. I would be willing to screw-up the mortgage market for half that amount!)

And... Fannie is raising its fees. Those extra costs will be passed onto borrowers as higher interest rates or closing costs. It's a sure thing that mortgage rates will continue their upward trends, making it still more difficult for home buyers to qualify for a mortgage loan. The same goes for those trying to refinance.

Fewer buyers will translate to not only more foreclosures and unsold homes, but falling home prices and tens of thousands of additional home owners who owe more on their mortgages than their homes are worth.

Investors should be very careful about buying in this market, even though homes are being offered at what seem to be bargain prices. A bargain is not a bargain if tomorrow's value is less than what you are paying today.

Are there any bright spots for investors? Thanks for asking, the answer is yes!

Prices for farmland in the heartland have hit a new all-time high. Even with the worst housing crisis since the Great Depression, agricultural real estate prices are higher than ever.

The USDA says that the average U.S. farmland is worth $2,350 an acre. That's up over 8% from 2007. There's even better news for most farmland in the Northern Plains -- Kansas, Nebraska and the Dakotas - it is up over 15% since last year.

Farmland in Massachusetts boasts the nation's most valuable dirt. It rings the bell at $12,200 an acre.

At first glance buying a farm has a great deal of appeal for many, but look out. In real life farming can be emotionally and financially stressful with success dependent upon many variables, including the weather, taxes, domestic and foreign competition, etc.

On the other hand, as the world's standard of living grows, so does the demand for food. That can make farm land very valuable for a long time to come.
About the Author
Mark Walters is a third generation real estate investor and founder of CreatingWealthClub.com. For a limited time Mark is offering his big guide to finding hard money loans for real estate investing free. Free guide to private money loans. http://www.FindPrivateMoney.info
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