Winners and Losers in the Housing Slump

provided by

"The Wall Street Journal Complete Home Owner's Guidebook: Make the Most of Your Biggest Asset in Any Market"
Three Rivers Press

Since the mortgage meltdown began in 2007, the housing market has been grinding ever slower and slower. Direst predictions aside, no one knows whether housing troubles will lead to an irreparable collapse of the nation's economy. But today's problems do clearly signal that home-owning can no longer serve one of the roles it has had for the last 60 years -- as Americans' principal means of building wealth.

For the foreseeable future, house prices are likely to remain stagnant or, in many markets, to continue declining. All but the most optimistic market watchers believe that prices won't bottom out for at least two or three years and that they're unlikely to start going back up until far into the next decade.

So many of us home buyers -- and most of us are home buyers and not home owners, because we are still paying off our long-term mortgages -- are facing broad double-digit home-value declines of a magnitude quite unlike any the U.S. has seen since the 1930s.

But as in any downturn in any other market -- stocks, oil, gold, even tulips -- there will be winners and losers. Here's a quick rundown of how you may stack up:

First-time home buyers. This could turn out to be the greatest "buyer's market" in U.S. history. Smart, cool-headed house shopping could well land you in your dream home at half or less what you might have spent five years ago.

Along with cheaper prices, today's twentysomethings are also likely to get a demographic break when it comes time for them to buy their houses. That's because the huge and aging Baby Boom generation will be leaving a plentiful supply of homes.

So don't listen to anyone who tells you that you must buy a house now. You have years to save your money and prepare to buy a home before prices will start to tick up.

Early-cycle home buyers. It could be rough. If you bought your first house within the past 10 years, the good news is that you face a new, much more affordable move-up market. But the bad news is that your home value could fall so much that you will lose most of your modest equity and could be "upside down," with a mortgage balance much greater than the market value of the house.

Take the price you paid for your house and cut it by 25% ($300,000 - 25% = $225,000). That's about the hit that home owners can count on taking in this market -- wiping out bubble-era appreciation and, for recent buyers, their down payments, too. If at that 25%-off value, however, you still have substantial equity or are about even, then you will probably be able to ride out the storm, provided you have a steady job and aren't facing unmanageably high interest resets.

Just be prepared to stay where you are for a long time. Continue saving for the long term and accelerate your mortgage payments so you increase your equity and reduce your long-term interest expenses. Every dollar you pay on your mortgage balance returns at least the interest you pay to borrow it. That may be the only return you see on your house for a long time.

Midcycle home buyers. If you entered the housing market in the late 1980s or early '90s, even if you have moved up since your first home, you probably have sufficient equity in your house to weather all but a doomsday decline.

So if you feel you really want to move up to a nicer house and want to take advantage of the downturn, you will have to scale back your expectations on the price you will get for your home. On the plus side, the home you want to buy will be cheaper, too.

If you have the cash to buy a new house without selling your existing one, you are in a good position to move up -- you will be able to drive a very good bargain and get your move-up home at a big markdown. But be careful: You don't want to be caught trading up -- and taking on more debt -- on an asset that's declining in value.

If you can't make a great deal on your new house -- 30% or more off the bubble-era value -- you shouldn't move. Take a look at better using the space in your existing home to make the most of what you have.

Late-cycle buyers and home owners. The market is most unlikely to eat away more than just a few years of price appreciation (great years though they were!).

If you entered the housing market before the first Bush administration, you are probably within sight of paying off your mortgage and are eyeing new uses for your monthly mortgage check.

Even if you have moved up once or twice and are still several years from paying off the mortgage loan, you probably have sufficient equity to weather this down market. Finish paying off your loan and try to save more for your retirement in 10 to 15 years.

If you are still working and are no longer paying for your house, you're probably now in a position to stash away cash at a prodigious rate. That's good. You'll need it. You won't be able to count on selling your house for the kind of money that you had hoped would fund your retirement.

If you are already retired, you will have to rethink any plans you had about selling or borrowing against your home equity as part of your retirement savings.

David Crook is editor of Sunday Journal.

Write to David Crook at David.Crook@wsj.com