Saturday, August 25, 2007

Bracing For A Possible Housing Crash or Recession

Recently, the talk in media is becoming more doomsday about the housing market and the potential of recession. Executives are coming forth with comments on a housing led recession, including Angelo Mozilo , Countrywide CEO, Bill Gross, PIMCO CIO, and Alan Mulally, Ford CEO. Interestingly, these commenters are those with a large vested interest in a Fed intervention. Countrywide originates 17% of mortgages in the U.S., Mr. Gross has been betting (incorrectly) on interest rate declines for the past two years, and Mr. Mullaly is concerned about the mortgage mess spilling over to auto financing. It's not enough talk for me to be worried, yet. However, it's enough talk for me to think about what I might do if there is a further housing downturn that is accompanied by recession.

Here is my current plan:

Avoid selling in short term. We consider our house a place to live, not an investment. Our house was purchased in 2003, with plans of staying for a decade or more. I don't expect any more job relocation with my company. We like our neighbors, proximity to shopping and the general area. Our house is a great match for our lifestyle and potential family growth. The school system is excellent.

Count on our margin of safety. We made a 40% down payment on our house and borrowed 60%. Also, we did a 30 year mortgage, even though we planned to pay it off in 15 years. By doing this, we kept our mortgage payment less than 13% of our monthly income. Also, we have an emergency fund that can cover at least a year of expenses, including our mortgage payment.

Reduce real estate tax. In the event our house value declines significantly, I will petition for a reassessment of our property. If accepted, our real estate tax would be lowered significantly.

Identify investment opportunities. When there is crisis, there is also opportunity. I am still contemplating how I could have profited from the housing and subprime collapse. I have seen a significant increase in foreclosures in my area. One of my wife's cousins has found a reasonable approach for foreclosure purchases. He rents his properties with option to buy, providing income and giving the buyer the opportunity to build equity before the final purchase.
Finally, I will maintain a large cash reserve to invest, should a good option be found.

For more on Reflections and Musings , check back every Saturday for a new segment.

Photo Credit:, Clara Natoli

This is not financial, real estate or investing advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

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