After the many recessions the housing market has gone through, it became clear to real estate investors and homeowners that such an even is waiting on the horizon. In fact, the ability to foresee a crash in the current housing market has become a lot more feasible to economists and investors than before.
What are the defining characteristics of the current housing market?
High lending standards
Banks and lending institutions are focusing on loaning high FICO scores. After the housing market crash, lending institutions and banks are giving more attention to credit scores to lower the risk of default. Currently, the average FICO score is 686.
Property sales are generally low
This will take some time to pick up. For the millennial generation, buying a property is not feasible as they can’t find a stable job, let alone buying an investment property. This can be noticed as more and more individuals are going for higher education and getting stuck in the whole student loans dynamic.
High property values
This can be especially witnessed in cities and metro areas. Individuals want to buy property but are retrained as property prices are skyrocketing. Furthermore, the income-housing cost ratio is getting higher and higher, leaving many first-time buyers unable to buy properties.
The homeowner is smarter and more aware
To be more politically correct, the homeowner or the real estate investor are more aware of their real estate surroundings. Now, people are building more equity in their properties than before. Of course, leaving equity in an investment property is a smart decision. It’s a cushion to fall on if anything drastic changes in the current housing market.
High-end property buyers
Homebuilders and property developers are catering to high-end property buyers. In addition, the average square footage of properties is rising.
Tighter lending rules
For real estate investors and house flippers, banks have tightened their grip on financing such investment strategies. A house flipper should expect 50% financing on such properties.
Why did the market previously crash?
In order to understand the current housing market’s characteristics and strengths, we must study previous housing bubbles and the circumstances that led to their crash. These are a few of the reasons that caused the last housing crash:
Interest rates are the price real estate investors pay for a loan. The higher the interest rates are, the lesser the available supply of properties for sale. Before the market crash of 2008, banks were giving loans at a very high rate compared to what is available in today’s current housing market. Additionally, conventional loans were only a small portion of the loans taken at the time. Meanwhile, lending institutions enticed property buyers with low interest rates that are adjusted after three years.
High default rates
The unfortunate property owners who ended up defaulting on their mortgages in the events leading up to the 2008 bubble burst have done so mainly because of the federal funds rate. If you had taken an adjustable rate mortgage, the fed had raised the rates at a fast pace between 2004 and 2006. To explain, the rate was fixed at 1% in June 2004 and, through a series of raises, had ended up at 5.25% at the end of 2005.
Eventually, this led to many homeowners defaulting as they were unable to afford the payments. Looking at the current housing market, the federal funds rate is 2% and it was raised very slowly to ensure no major setbacks happen.
Investing in risky financial products
Before the bubble burst in 2008, the housing market was booming, people were taking on loans, and properties were being bought. However, many of those borrowers were not vetted correctly and were high-risk borrowers. Meanwhile, banks and lending institutions were selling mortgage-backed securities. To be precise, banks grouped mortgages together and sold them to investors and other banks in these mortgage-backed securities.
Of course, if banks go back to dealing in such risky transactions, it could lead the current housing market to crash.
What are the steps that real estate investors and homebuyers can take to prevent losses of a current housing market crash?
Always go for positive cash flow properties
Positive cash flow properties leave you at ease. You’ll go to bed every night knowing that your income property will cover its own costs. In the case of the current housing market crash, you can rest assured that you won’t be as affected as owners of negative cash flow income properties.
Pay your mortgage and build equity as fast as you can
Firstly, we have to acknowledge that a mortgage is a debt. Therefore, it makes perfect sense to eliminate debt as fast as you can. By paying off your mortgage, you protect your mortgage interest rates from the federal funds rate. Moreover, as a real estate investor, you should refrain from using your home equity, build as much equity as you can, and finish paying off your mortgage.
Use an investment property calculator
The use of an investment property calculator is mainly focused to base future property predictions on actual calculated numbers. Therefore, using this tool can protect you by informing you of what logical return on investment you can expect and whether or not your interest rates and costs are higher than the property’s rental income. Mashvisor offers just that!
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Stay away from fixer-uppers
Fixer uppers are not the easiest real estate investment strategies to go for. There are many factors that can make or break such an investment. In the current housing market, banks are not funding fix-and-flips in total; they want the real estate investor to put equity into the home as well. Instead, it’s highly recommended to go for a ready property that won’t exhaust your financials.
Diversify your investment portfolio
There are many types of investment properties to go for. As a beginner real estate investor, consider buying rental properties. These include single-family rental properties and multiple-family rental properties. Additionally, many real estate investors go for commercial properties, industrial properties, or land. For more information on how to grow your real estate investment portfolio, read this blog post: Our Expert Guide on Growing Your Real Estate Investment Portfolio.
Is the current housing market on the verge of a crash?
Studying the current housing market can tell you that it’s not! It does not share any of the characteristics the housing market showed in 2008 or the previous years. After all, you can rest assured that no one, including the government, wants the current housing market to crash.
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