We all remember what happened during the great recession (2006-2008), and if you are like me you are trying to forget it ever happened. But unfortunately, it affected everyone, not just people who owned property at the time. You see the housing industry is a huge machine that not only fulfills one of the basic human needs (housing), but drives the economy as well. When people buy homes they buy knick-knacks, chotskies, and of course furniture for their home, and that pumps a lot of money into the economy. So when our economy went into a great recession, it also stopped the economic machine. People started spending less.
But Mark, what does this have to do with today’s market?
I’m glad you asked. Pull up a seat and get a little closer . . . ok, that’s too close.
Leading up to the great recession there was something called greed and jealousy starting to rear its ugly head. (There is a reason they are called deadly sins.) People were trying to keep up with the Jone’s, Smith’s, and everyone else with a last name (except Prince he doesn’t have a last name).
If you wanted to buy a house you could get by with a very low credit score (in the low 600’s), and what’s even crazier there were mortgages being given by only looking at your salary! You can’t even rent an apartment without someone running your credit report. What were banks thinking about giving out mortgages like it was Halloween? I’ll tell you what they were doing . . . they were thinking about all the money they were about to make!! They couldn’t get people to sign fast enough (think road runner fast or Jimmy John’s freaky fast) and get people locked into risky loans on overvalued homes.
What if I told you I would buy your car for 20k more than it is worth? Would you take the deal? Of course you would and so did the banks. A home that was on the market for 400k was being appraised for 500k. And neither the buyer nor the bank cared. Buyers were finally beating the Jone’s, Smith’s, and Prince because now they have this lavish lifestyle with a 5 bedroom house while only having 3 people in the family, but guess what my house is bigger than yours . . . and size matters when it comes to homes apparently.
There were also people who had homes already that were taking out home equity loans (loans against their home) to fund their lifestyle (in order to keep up with their neighbors). This sudden increase in value meant they could borrow more money which led to people buying cars and boats they wouldn’t otherwise have bought. So when the housing market crashed these people could not sell their home to cover their debt . . . which led to them foreclosing on their home!!
Both the new home buyers and the home equity borrowers had the same problem . . . their home’s value tanked faster than the Titanic. This in turn led to people filing for bankruptcy and their home being foreclosed.
So what’s different now other than the high interest rates? Is there a silver lining?
First of all if you haven’t already read my amazingly insightful blog post The truth about mortgage rates today please take 30 seconds . . . go ahead I’ll wait for you to come back.. Are you ready?
- The federal government bailed out the banks, but in order to get bailed out they had to change their lending practices. That meant no more risky loans AND no more over valued appraisals. In other words, no more predatory lending. My brother who was single at the time and a new drug rep was approved for a 500k mortgage. What was he going to do with a home worth 500k? Get into serious trouble! So that solved 2 major problems.
- Right now we are in a housing shortage. So if I remember my high school economics class about supply vs demand that means when there is a shortage of supply the demand goes up. (My high school economics teacher would be so proud.) Right now the United States is short 3.8 million homes. So even if there was a sudden influx of homes like say 1 million homes from foreclosure we are still short on inventory. Those homes would get gobbled up faster than Thanksgiving dinner!
Here is what it looks like in the Chicagoland area:
But there is some good news . . .
Real estate can be a hedge against inflation. A fixed rate mortgage locks you into a steady and predictable monthly mortgage which means even if the mortgage rate goes up you are staying steady each month. Even better if the rates go down you can request a rate modification or refinance your mortgage and save even more money each month.
Home ownership is a long game. Homeowners who buy and hold for at least 10 years have a 93% chance of selling their home for more than what they originally paid. That’s through natural appreciation of your home’s value and paying down your mortgage.
Did you know that the average homeowner stays in their home for 8 years before deciding to sell? That means you will have enough equity in your home to make a profit, and use those proceeds towards your next home.
If all of this sounds confusing, and you would rather meet in person to see how much I use my hands when I get excited talking about real estate then contact me and I would love to discuss your personal situation in person.
