Is the Real Estate Market About to Crash? What You Should Know
There were a lot of factors that caused the housing bubble and the ensuing economic recession of 2008. We all know what happened: people were on a spending spree for homes they couldn’t even afford; interest rates were kept low; high-risk mortgages were clutching the banking sector by the throat.
This confluence of forces stirred up a perfect storm of loan defaults and foreclosures that had prompted the government to rescue the banking sector from a collapse. But a decade later, we have seen home prices rebound to pre-crisis levels…. which is a good thing?
Apparently not, as GE Miller points out in an article published on 20 Something Finance. With big banks such as Wells Fargo toying with high-risk mortgages and median incomes growing at a sluggish speed, we are seeing pretty much the same conditions of yet another crisis that’s about to take place.
The real estate sector will experience another steep dip, but this shouldn’t inhibit homebuyers. If anything, these observations should help them better understand the market and secure themselves from an eventual slowdown.
A Process in Four Phases
Teo Nicolais of the Harvard Extension School gave a valid view of the real estate sector’s (literal) life cycle. Using American economist Henry George’s theoretical model of the market, we can map out the cycle as consisting of Four Phases: Recovery, Expansion, Hyper-Supply, and Recession.
In the Recovery phase, investments pick up as previously occupied properties are put on sale against a backdrop of low-interest rates. As demand keeps rolling by during the Expansion phase, rent growth is expected to rise, indicating strong market fundamentals.
The boom will eventually lead to Hyper-Supply in which supply trails behind demand and the market is flooded with unsold product. This leads us toward an increase in interest rates which relatively slows down new constructions but fails to stop the onslaught of high vacancies, triggering the Recession phase. The cycle repeats itself with a high inventory of distressed properties.
This is how the market works, but it shouldn’t sideline developers and property buyers who are now leveraging the current Expansion climate.
For homebuyers, it’s just a matter of rolling with the punches.
Surviving the inevitable
Can we stop the real estate market from imploding like it did in 2007? No. Can homeowners survive a coming recession? Yes!
For Miller, you only have to be financially stable and conservative with what you want in a home. A decade ago, homebuyers were quick to leverage a low-interest environment, thinking that rents will stay low and median incomes will rise. This confidence was highly speculative and it did the real estate sector in with a wave of mortgage defaults.
So, to avoid the risk of defaulting, you might want to increase your downpayment to scale down interest. You might also need to maintain a good credit record. Another strategy to consider is getting a line of credit or LOC from a bank. This highly flexible arrangement allows you to borrow a pre-determined amount of cash at any given time.
Moreover, LOCs are also great for conservative homebuyers who opt for better repayment terms based on their needs. Still, a better option would be to search for a home that rightly fits your lifestyle and won’t entail exuberant homeownership costs.
For that, you will need to get a realtor who can help you secure a piece of property for the right price.