We're thrilled to present this smart Learnvest story here on Savvy!
Many things have happened in the past two years: From the collapse of Lehman Brothers to the Greek bailout, complex forces have been at work. We’ve spoken to a lot of young people who are considering buying a first home, but there’s a great deal they don’t understand about why the real estate bubble burst in the first place. Although some homeowners suffered massively, other homes lost a little value but were basically fine (hi, Mom!). What gives?
The answer lies in an old fashioned slogan: “All real estate is local.” The real estate downturn wasn’t one massive collapse, but many. We’ll look at some major factors so that if a curve ball like that comes around again, you’ll know how to hit it. Keep reading.
1. Mortgage Funny Business.
In the early 2000s, many lenders offered mortgage loans to people who didn't understand and couldn't afford them. This whole dirty underbelly of the mortgage business is known as "subprime lending." As those homeowners stopped paying their mortgages, we saw a wave of foreclosures.
The Moral: Never take a mortgage you don’t understand.
For Further Reading: Confessions of a Subprime Lender: An Insider’s Tale of Fraud, Greed, and Ignorance, by Richard Bitner.
2. Lots of Real Estate Speculation.
Although real estate bidding wars took place in a lot of different cities, there was something special about places like Las Vegas and Miami, where the new condos just kept coming, and investors just kept paying more…until they didn’t. The last investors were left holding properties that they never intended to own long-term. The worst of this crisis (and half of all mortgage defaults) took place in “the sand states”: California, Florida, Arizona, and Nevada.
The Moral: Don’t buy a home that you’re not willing to live in for at least five years.
Further Reading: The Big Short, by Michael Lewis.
3. Big-Time Unemployment.
In general, the real estate market is good in places where there are lots of high-paying jobs; the market deteriorates when workers get pink-slipped. That’s roughly what happened in Michigan, where the auto industry is so important (and had so many layoffs). The opposite is true, too: The real estate market held up pretty well in cities like Dallas, where unemployment has been lower than the national average.
The Moral: Before you buy a home, make sure you have an emergency fund in case you lose your job.
Further Reading: Crash Course, by Paul Ingrassia
For more smart tips from Learnvest, check out: