Not a good time to be adding to your mortgage debt if you live near a coast

As economist Paul Krugman points out in a recent column, many experts think that there has been a major “bubble” in housing prices in most areas on both coasts. They feel this cannot last and expect housing prices in these areas to drop by 35-40% measured in real dollars over time.

If this happens over time, inflation will account for much of the decline, and “nominal house prices” may decline by only 10 or 20%. That would not be too hard on family financial situations in most cases.

But there is some fear that this reduction will occur quickly, putting many highly mortgaged houses “under water” — with mortgages in excess of their total value. This could cause major problems in the economy.

If your house value has grown significantly in the last five years or so, this would not be a good time to increase your mortgage with refinancing or a second mortgage. The value you are borrowing against may disappear.

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