Blair has worked with everyone from small business owners to major universities to find their voice and tell their story – their way. When she’s not busy surfing Pinterest for her dream home (complete with massive walk-in closet), she’s busy utilizing her law degree to write for attorneys and real estate professionals.
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For a homeowner or a buyer, the thought that the housing market might be crashing is pretty scary – the last thing you want is to be responsible for an enormous, overvalued asset while the economy is crumbling. But sometimes, the housing market can remain strong while the overall economy is suffering, and vice versa.
When the price of homes plateaus after growing consistently year-over-year, it could serve as a warning sign of a housing market crash.
Land is an appreciating asset because there’s only so much of it (and not all land is buildable). The price of homes (including the land) usually increases by about 4% per year.
When home prices level out or plateau, it affects home appreciation as well as the real estate sales market. Sometimes when enough sellers are unable to find a buyer for their homes, they will lower the price in order to attract more buyers.
If you are unsure about how prices have changed on a national level over time, the Case-Shiller home price index is available on the St Louis Federal Reserve website and shows the change in home prices since 1987.
Another sign that a housing crash may be imminent is when we start to see lower credit standards and riskier mortgages expanding in the market. If lenders loosen up underwriting standards too much, these higher-risk mortgages can trigger a housing crash because they could be offered in bulk to buyers who can’t actually afford the homes, or for home sales where the properties are priced higher than their market value.
Prior to 2007 and 2008, many lenders handed out subprime loans and limited documentation loans to risky applicants, which ended up fueling the Great Recession. The Dodd-Frank Wall Street Reform and Consumer Protection Act established more mortgage regulation and ended many of these high-risk practices that led to the housing bubble. Lenders had to increase lending standards, some of which included the requirement for increased verification and documentation requirements for the borrower’s ability to afford the home, higher credit scores, or larger down payments.
On the flip side, when lenders start loosening up those standards to accommodate too many higher-risk borrowers, it could lead to a situation that triggers a housing bubble (i.e. artificially inflated home values) followed by a housing market crash. This is why it’s important to educate yourself about lending requirements, especially higher-risk mortgage loans.
We used to hear that the standard down payment on a home was 20%. However, many buyers are unable to put down that large an amount. Mortgage insurance (or private mortgage insurance for conventional loans) is required for borrowers who are https://www.maxloan.org/title-loans-ma/ considered riskier because they do not have a 20% down payment.
When homeowners who lack large savings purchase a home, they can potentially experience a higher amount of outstanding debt than what the home itself is worth, leaving them with negative equity. This is especially risky when homes are being overvalued, which is what happened back in 2008.