How Well Can You Absorb a Potential Decline in Home Values?

As you will see below, Mr. Greenspan seems to think most people will be able to absorb a potential fall in prices, my question to you is – how well can you absorb a fall in home value. If you have been drawing from your home equity and betting that your home’s value will keep increasing you might end up up-side-down if home prices fall. Here is the article I’m referring to:

Greenspan: Most Homeowners in Good Shape
By Jeannine Aversa, AP Economics Writer
Most Homeowners Can Weather a Shock if Prices Drop, Greenspan Says

WASHINGTON (AP) — While the high-flying housing market still holds risks, especially for the financially stretched, most homeowners are in a fairly good position to weather a shock if prices drop, Federal Reserve Chairman Alan Greenspan said “The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices,” he said in remarks delivered via satellite to a banking conference in Palm Desert, Calif.

Still, Greenspan, who has repeatedly warned about the potential perils if the housing market were to suddenly go south, also made clear that there are several factors — risky mortgages and speculative activity in particular — that warrant close scrutiny.

The quicker turnover of second homes — such as for investment or vacation purposes — appears to be feeding the surge in house prices, Greenspan said.

“Speculative activity may have had a greater role in generating the recent price increases than it customarily has had in the past,” he said.

Greenspan’s latest thoughts on the housing market came after the National Association of
Realtors reported that sales of previously owned homes in August posted their second-highest level on record. Home prices, meanwhile, increased by the largest amount in 26 years.

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