Housing Bubble 2.0 is Here. Protect Yourself from a Housing Crash.

I was casually reading a local news article on housing prices across the Michigan market when I noticed something odd – in every major city that I checked, the average home sale price had surpassed the average home sale price just before the housing crash/Great Recession (and it’s even higher now).

Hmm… that’s odd. I knew home prices had rebounded some over the years – but to pre-housing crisis levels? And in a state that was absolutely decimated economically with a double-digit unemployment rate?

So, I did some research. And, sure enough, the U.S. home price index showed that this was not just a one-state phenomenon – housing prices have now far surpassed pre-crisis levels nationally.

housing bubble

But things are different now, right? Well, ummm…

You’ll notice that the price increases are rising at a rate that was not too dissimilar from the increases just before housing bubble 1.0 burst. In fact, the rate increases are much higher.

Dozens of banks are offering mortgages with minuscule 3% or 5% down payments. Not only that, but they are offering them for amounts over $500,000 and to those with a FICO credit score as low as 620!

This isn’t as bad as the zero-down, “anyone can choose their own amount” policies of Countrywide Mortgage and a few other kamikaze financial institutions back in 2007, but it’s not far off.

Have we learned absolutely nothing? Here’s where things get even scarier. Real median income in the U.S. is only slightly higher today than it was in 2007 (or 1999).

housing crash

If you’ll remember, what really got us into trouble previously was the fact that people were defaulting on mortgages that they could not afford. Naturally, the higher the percentage of your income that you put towards your home, the higher your risk of default should that income become interrupted. Average housing costs in the U.S. are at $22,624 annually. That’s 33.8% of average total household expenses, which is a risky high level (and growing). Many families are at levels far higher.

Vanished home equity and defaults on high-risk mortgages is what led to a domino effect and a whole mess of shadiness-coming-to-light that led to financial institutions going under, mass layoffs, bailouts, and more. Some of that shadiness was eliminated due to Dodd-Frank, but Republicans rolled back most of those protections.

Corporate risk aside, the underlying household economics this time around aren’t really much different than they were 8 years ago. And that’s worrisome. What will happen when the inevitable next recession happens and the layoffs start rolling in again?

On top of all this, we’re also seeing the Federal Reserve aggressively raising mortgage interest rates in an effort to cool off inflation (including in the housing market).

I think housing bubble 2.0 is here. And by my estimation, the next housing crash is not a matter of “if”, but “when”.

How to Protect Yourself from the Next Housing Crash

Obviously, avoiding the personal finance catastrophe that can come with a recession and housing crash is a good thing. So how do you avoid it?

There’s a host of factors that improve your chances of not defaulting on a mortgage:

  1. Job security: the more job security you have, the less likely you are to lose it in an economic slowdown. There are factors that can help you recession-proof your career. And it’s generally a good idea to hold off on buying a home until you’ve been in a job for a while and don’t intend on relocating any time soon.
  2. Price-rent ratio: you need a place to live. And the markets that are most affordable to own in typically have a low price-rent ratio. But you don’t have to buy a home to live in. If you live in an area with a high price-rent ratio, it can be a sound financial move to just keep on renting. Let the landlord carry the risk of default. Besides, once you have bought a home, you realize that it’s much less appealing than the dream of owning a home was.
  3. Down payment amount: if you pay at least 20%, then you do not have to pay PMI or interest on a second mortgage, which reduces your total monthly payment (and income needed to pay it off). This is why you should not avoid a 20% down payment. The higher your overall down payment, the less in interest you’ll pay.
  4. Net worth: the higher your non-home equity net worth, the less likely you are to default on a mortgage, as you can pull from other assets to cover any income dips.
  5. Size of home: the less space you need (we truly don’t need as much as we think), the less you’ll pay. This is not only applicable to the home price itself, but also taxes, insurance, maintenance, energy, decor, and more. This is why downsizing can be an incredibly wise move.

Remember, your home is not an investment. Nor is it a panacea of happiness. And it shouldn’t even be your “American dream“. It’s simply a place to live. Don’t risk your financial future for it.

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