Real Estate Crash: Lessons Learned

real estate crash

As the real estate market settles into the bottom and even starts to climb after the real estate crash, future homebuyers should take time to understand how the US real estate market found itself in such a poor state.

Real Estate Crash: Consumers View of Real Estate

Over the last ten years, homeownership went from a hard won privilege to a cheap lottery ticket. In the past consumers viewed owning a home as something to be strived for. They saved up 20% – 50% of the down payment and sought to make their house a home for the next 5 -10 years.

As interest rates declined and prices rose, consumers begin to look at real estate as a means to get rich quickly. In fact, many of the early investors did just that. Unfortunately, many areas simply became unaffordable and many buyers/owners were running very low on cash. As low teaser rates expired, homeowners could no longer afford to pay the mortgage and with home prices declining, selling became impossible.

Going forward, consumers need to shift their mindset. Real estate can be a great long-term investment strategy, but it also represents a very poor and volatile short-term investment. Relying on a short-term sale as an exit strategy to avoid mortgage payment resets will not work anymore. Taking a longer term view will add tremendous value to neighborhoods and significantly decrease the likelihood of foreclosure.

Financing Real Estate Purchases

Long gone are the days of a simple 30-year fixed mortgage after this real estate crash. Now consumers can access 40 or 50-year mortgages, option ARMs (adjustable rate mortgages), pick-a-pay and more. Understandably many consumers were confused by these choices and unsure of what their monthly payment would be. Resets always seem to hit at the most unfortunate time, sometimes doubling or tripling mortgage payments.

Everyone pointed the finger at everyone else. Consumers claimed they were tricked by unscrupulous mortgage brokers. Brokers said they were only pursuing the best incentives provided by banks. Banks admonished consumers for not reading and seeking to understand documents before taking on thousands of dollars of debt. In the end, everyone in the process was to blame and should learn for their mistakes.

Consumers should learn to read every document thoroughly and ensure that they know when and by how their payments will rise during a reset. They assume that they will be in their home for at least 5-7 years. Brokers should seek to better understand their clients’ needs. Does it really make sense for a school teacher making $30k to purchase a $500k home? Banks also need to be more vigilant. Relying on the foreclosure process to recoup losses has been a tough less for banks. Not only are they suffering huge losses on their loan portfolios, but they are also being heavily scrutinized by the government for their lending practices.

It’s a new day in real estate. Going forward, consumers need to take the lessons of the past two years to heart. A home can be a great investment, but in the end it should be a great home first.