Coping With a Drop in Home Prices

Over the past year you've watched as real estate in your neighborhood dropped in value. It didn't really hit home, though, until last week when your next door neighbors told you they hadn't made mortgage payments for five months, that the bank was foreclosing, and that they'd be moving soon. For the first time you're looking closely at your own home, wondering what the future holds.

Consider a not untypical situation. You purchased your residence three years ago, during the real estate frenzy, for $400,000. Your mortgage balance is $350,000. But as you visit weekend open houses in your area, you see homes like yours offered at $300,000. There's an unpleasant word to describe this disparity: upside down. So what do you do?

Despite your initial despair, the key to your action involves two fundamental questions. First, do you like the home you live in? Secondly, are you reasonably certain you can afford future mortgage payments with relative ease? If the answer to both these questions is yes, your wisest decision will be to put the smile back on your face and stay where you are.

Let me offer a testimonial of sorts. In the summer of 1989, at the peak of a real estate boom, my wife and I moved into our new home, built on the lot we purchased two years earlier. Upon move-in, comparable houses were selling for about $900,000. By 1993 the market had collapsed, our house having declined in value to $600,000. Though I'll admit to being somewhat dismayed, we liked where we lived and could easily afford it. So we simply stayed put. Living in this $600,000 house seemed as enjoyable as when it was $900,000. And we're still here. It's worth about $2 million now-admittedly, down from $2.5 million a year ago- but who cares? It's as delightful as ever.

The moral: Only when your residence is unpleasant or beyond your means is its value significant. If where you live is both enjoyable and affordable, you're home free. When you select your area prudently, values rise as years pass. Over the long haul, the booms and busts result in steady appreciation. So choose your home with care and don't concern yourself with market gyration.

AL JACOBS is the author of Nobody's Fool: A Skeptic's Guide to Prosperity. Visit him online at www.onthemoneytrail.com.