Economy & Jobs
Understanding America’s Housing Bubble
Beginning in 2007, the United States went through one of its biggest housing bubbles in history. When this bubble eventually burst, it created serious economic problems, leaving countless homeowners in terrible economic positions. It’s important to understand what caused the bubble, how it burst, and how you can avoid falling victim to a bubble, should another occur.
What Inflated the Housing Bubble?
The American housing bubble was caused by the lack of responsibility by both borrowers and lenders. The lending standards for mortgages were very loose, so unqualified people — such as those with weak credit scores — were being approved for loans.
This extra buying activity caused housing prices to increase, and started a vicious cycle. Lenders loosened their mortgage standards even more because they figured that if a buyer couldn’t pay off their loan, the lender could resell the house for a profit. Many Americans also purchased homes with the plan to sell the property quickly for a profit, and had no intention of ever paying off their loans.
Eventually, this cycle reached its limit, and there weren’t enough new buyers to keep pushing housing prices up. When prices stopped increasing, people panicked and tried to sell their properties all at once, which caused a pricing collapse. Many homeowners saw money disappear in the form of property value, in some places dropping as low as 55 percent or more. Others were stuck with mortgage loans they couldn’t afford and eventually lost their homes to foreclosure.
The Current State of American Housing
For years after the housing bubble, the American housing market was in bad shape. Even with prices remaining at all-time lows, no one was purchasing a new home. Over time, the situation slowly improved. The prices of homes started to stabilize and regain value in 2012. According to housing experts, the prices of homes are expected to continue to stabilize through 2015.
The Consumer Financial Protection Bureau has also taken action to prevent a future housing bubble by launching tougher lending standards in 2013. These standards prevent unqualified buyers from taking out mortgages.
Protection From Bubbles
If you’re looking to buy a house and want to avoid being affected by another housing bubble, there are a few ways to protect yourself. First, don’t purchase a home unless you’re planning on staying in the same area for a long time. While housing prices do fall, they eventually realign themselves. If you hold onto the same property for more than 10 years, you’ll have time to ride out short-term problems.
You should also aim to make a sizable down payment of 20 percent or more on your home. This will make your mortgage payments smaller, and you’ll be less likely to get into financial trouble.
Finally, keep your finger on the pulse of the housing market. You can tell if a bubble is forming by researching rent prices versus housing prices. If both prices are going up, that’s a sign of a strong market in a hot location. If the cost of homes is going up but rent isn’t, that’s the beginning of a bubble. Prices are going up because of investors, not because of potential residents. You should, therefore, avoid purchasing a home in these areas.
The American economy is still recovering from the 2007 housing bubble. As prices continue to stabilize, and officials amend lending standards, it’s important to keep the cause of the bubble in mind and protect yourself should another occur.