With home prices rising in many areas of the country, many people are worried that we are headed for a housing crash similar to the one in 2008.
However, it’s just not true. Today’s market couldn’t be any more different than it was before the crash of 2008.
Here are four reasons why we aren’t headed for another housing crash:
1) Banks Have Tightened Their Lending Practices – The biggest contributor to the crash of 2008 was risky lending practices. Financial institutions had extremely loose standards in terms of who they would lend to: they were giving out mortgages to people with low incomes, bad credit and those who were unlikely to be able to pay their mortgage once their interest rates increased. While this made home ownership possible for people who previously needed to rent, it also led to millions of people defaulting on their loans.
Today, those predatory and unethical lending practices have been completely overhauled. Mortgage standards are more strict and lenders are much more cautious in who they lend money. This has led to greater stability in the market and will prevent another crash like what occurred in 2008.
2) Fixed Rate Mortgages are the Norm – A huge part of the housing crisis was subprime mortgages. The mortgages given to the riskiest borrowers were adjustable rate mortgages. Once the introductory period ended, borrowers saw their interest rates skyrocket and their mortgage payments quickly doubled or tripled in size, making them completely unaffordable and leading to mass defaults on loans across the country.
But today, adjustable rate mortgages are significantly less common. Fixed rate mortgages are the norm. People know exactly how much their mortgage is for the life of their loan…allowing people to budget their money better and borrow what they can afford.
3) Today’s rising prices are a supply and demand issue, not the beginning of a bubble – In 2008, prices rose rapidly because everyone wanted to buy property…including those who previously didn’t have the ability to do so. This created a frenzy in the housing market.
Today, prices are rising because people are staying in their homes longer, which means there is less inventory available in competitive markets. When there is less inventory, there are more people vying for the limited homes available, which drives up property prices. This is a normal part of a competitive market and not a reason to worry.
4) There’s Economic Growth to Support Rising Prices – The most competitive housing markets in the country are the markets with the most opportunity. People are flocking to areas where there are jobs, stable economic growth, and opportunities for the future. When there’s economic growth to support growing prices like there is in today’s hottest cities, it makes for a much more stable market.
So take a deep breath and know that the conditions of today’s market are very different from the conditions in 2008. Because of the changes made in lending practices after the crash and our booming economy, you can rest assured we won’t see a housing crash anytime soon.