Ten years after – what does it mean for the buyer today?
For those of you who want to morph from generation rent into generation buy, you may be wondering if now is a good time to purchase. The bursting of the housing bubble in 2007 left many people bruised, figuratively, if not bankrupt, more literally. But now, years later, the dust has settled a bit.
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If you are thinking about purchasing your primary residence and as long as you don’t have eyes bigger than your pocketbook and not worry about keeping up with the Joneses, you should be okay. For the moment, normalcy has returned to the real estate market, notably with prices falling into line with long-term appreciation. While mortgage lending standards are still more strenuous than the pre-burst period, especially for those with low or even non-existent credit scores, there has been considerable easing among regionally-focused lenders (credit unions, non-chartered banks, etc) and mortgage insurers.
But if your reason for buying is to fund your retirement or bloat your piggy bank, keep in mind that many analysts judge that real estate is still overvalued, by 25% to 60%, and fear that another crisis may be just around the corner.
Understanding a housing bubble.
The American housing bubble that reached its peak in 2007 was a real estate bubble observed on a national scale throughout the property market in the United States. The housing bubble formed following the stock market crash of 2000. Money naturally followed its nose into housing and property, generally considered a “safe” investment. With the economic recession, scads of cheap money was available. Fannie Mae, Freddie Mac and the sub-prime gang crashed the party with low interest rates and as little as 0% down. As demand increased, supply dropped, and house prices continued to rise fantastically. People stampeded to get into the market to make a quick, and lucrative, return.
Why did the bubble burst?
What goes up must come down. By 2007-2008 property was over-valued and people began defaulting on their subprime mortgage loans. Subprime mortgage lending was halted and interest rates for other forms of mortgages rose drastically. Demand began to dwindle; suddenly those over-valued houses were underpriced and…. bang!
A brutal decline in housing prices followed. The increase in the number of foreclosures and repossessions following the drop in real estate prices had repercussions in different categories of the mortgage market and amongst developers, builders, related companies, hedge funds. National and foreign banks were hit hard, leading to the recession in 2008.
Prices continued dropping until the end of 2011 and even later; investment in new property construction slowed down. We witnessed a retrenchment in the mortgage market with its stricter controls and lending criteria following the subprime crisis. In addition, although we cannot really say that a “rental property bubble” has resulted, rents have become undeniably high and continue to increase across the country, and this applies to Great Britain as well.
First off, there’s no justification to keep renting since you don’t gain from asset appreciation.
Next, the mortgage market has regained a more rational attitude. Before the bubble burst, borrowers were duped into selling their souls to the devil for a subprime mortgage loan. In the following years, buyers had to practically promise their firstborn to get any sort of mortgage.
At the end of the day, the goal is to minimize risks. Lenders will be looking to and so should you. Try to bring some personal funds into the transaction with a down payment of at least 10%, if not more, to optimize the loan-to-value ratio.
At the same time be wary of commercials or advertizements that promise you a mortgage in a click of a mouse. It’s better to consult a loan comparison site such as CompareLend.com to shop around amongst viable mortgage lending companies.