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.
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).
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:
- 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.
- 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.
- 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.
- 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.
- 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.
3% down is insane. Though my fiance and I are feeling ready to be homeowners, we won’t buy a house unless we can afford the 20%. If you can’t afford an actual down payment, you probably can’t afford the house is our thinking. Great post!
We bought with 10% down in 2011… got the PMI removed a year later and are up $200k in equity. Timing is everything… if I only had 3% at the time I still would have been smart to buy.
Its only 200k in equity if you sell it. Until then, it means nothing – and even less when this whole thing crashes.
I bought a multiunit property for 270k, put about 150k in and had it appraised at 750k. I used a cash out refinance to pull out 80% of the new value. After paying off my previous mortgage, I had about a quarter million dollars cash on hand. This is a multi-unit, so my new payment is a little over $3k a month, but the other 3 units pay about 5k a month in rent. I cash flow positive 2k a month after paying my mortgage, live for free, and am sitting on 250k whereas I only had a little over $100k at the beginning of this project.
If I really wanted to, I could have used a HELOC to tap into that equity. I understand that your concern centers around the fact that equity can be wiped out with a poor appraisal. The counter to that is to tap into your equity now, if you are so confident it will happen.
> I cash flow positive 2k a month after paying my mortgage
bought it for $270k, spent another $150k, and the cash flow is $2000/month?
as big fat crude math that’s only .00044%/month ROI. you’d need to earn 227x more, per month, to earn 1%
and that’s without including the calculations on the $250k debt from the cash out refi.
sorry to be the bearer of bad news, but this was not a wise financial choice. lots of cash is moving around and giving the illusion of success. but you’re almost a million bucks in debt and earning less than 1% a year on it. after inflation, vacancies, repairs, taxes, etc, you’re in the red. deeply in the red.
HA! Harrison you owned him!
Advertising HELOCs? You should have cashed out at $750,000. Rolled it into a 1031 and got something bigger. Cash refinance is a dumb option. The interest payments over 20-30 years are way more then the principle. You could get several places with all of the interest you would be paying over that time frame. You should have sold it. Owe no one and leverage yourself later with all of that cash you would had. Bank leverage is false richness.
Not true: It means they could have PMI removed because they accumulated beyond 20% equity.
I like that comment. It’s true. Don’t let your homes value allow you to feel rich.
How did you get the PMI removed after a year?
I am guessing that the question is not what specific steps to take, but how it was possible to do it so quickly.
The balance owed is compared to the appraised value to calculate the 80% debt, 20% equity number. When the house appreciates to the point where it is worth 20% more than the mortgage, you can have the mortgage interest removed. Since “2011buyer” put 10% down, the house only had to appreciate by 10% for that to happen. My home has appreciated on average about 6% per year over four decades.
Seeing a 10% bump in a single year is not uncommon, but is possible, as value changes vary depending on the market.
Other years may be marked by a lower increase in value, even depreciation, as we saw between 2007 and 2009.
Best of investing to you!
I’m hoping for a housing crash at some point.
It makes a perfect buying opportunity for those of us who would like to pick up a few more rental properties. :)
I don’t feel good about hoping for a crash. If it happens, I’ll take advantage, but I don’t need it, and don’t wish it. I just can’t feel good about benefiting from the financial misfortunes of others.
Financer with morals….bonus points!
agreed. Hoping is the wrong word. The fact is it will happen whether we wish it or not. The volatility is the price we pay for long term appreciation.
Govt prefers inflation. You get taxed on your “nominal” gains. so you have to earn atleast inflation * (1+ tax rate) to keep up with inflation. Imputed rental income is not taxed so a house has a role in my financial portfolio. I will keep my house for a long time for a while. It also helps that employment opportunities in my area are quite good (san jose california)
Financial misfortunes?? More like financial ignorance.. it’s a dog eat dog world buddy
you’re not a dog, and neither are “they” or am I.
Can I hope for a crash if I’m to be a first time home buyer. It’s not that I await the misfortune of others, it’s that I don’t want to be forced into getting ripped off myself
My brother in law was licking his chops and waiting for the crash so he could snap up 3 or 4 houses in his community…….. Fast forward to 2018. He didn’t snap up those houses. He’s living in an an apartment and and burning up cars to grift Insurance companies. Such is the life of a lizard
can’t wait for another crash. I want to buy another house
Timely article I just saw the movie the Big Short which went deep into the crises in 2007. I was still a student in 2007 and started investing in 2009, and the market has done awesome until now. I knew the good times would come to an end at some point.
A lot of my friends and family are talking about buying houses a LOT bigger than they currently have, which leads me to believe that many others are too which is why the 2007 crash happened in the first place.
I’m currently saving up for a rental property so maybe I can take advantage of falling prices sometime soon. Not hoping for a crash since it will ruin many people’s lives, but might as well use the situation to your own financial advantage if possible. Great food for thought.
I haven’t seen that movie yet. Was it worth the time?
For me, It shed light on how careless the financial industry actually is…
You should definitely check out The Big Short, the movie is great but you won’t walk away feeling very good.
Without a doubt worth it!
It is on Netflix currently.
Watched it twice and found that it was one of those films that when you go back, you find new things you missed the first time.
Love the blog by the way!!!
Real Estate and home prices in my area in Grand Rapids for the past year have been in the ballpark of about 20% over the peak in 2006… Prices just can’t go up that fast and sustain themselves. It is a great time to sell in my neighborhood and while my property is now a rental.. I’m still hanging on to it with the focus on it being paid off in the near term.
I like the call! But I don’t think there’s going to be a crash. Lending is still so tight and there are so many people paying all cash offers, way more than in the past .
If you think the housing market is going to burst how much do you think it will decline by? Will you be selling your house or are you renting right now? You’re already seeing softness in the high-end markets. I’m thinking there will be a time percent 15% correction over the next three years.
Inflation adjusted home prices are above pre-crisis highs…. but you’re on to something Financial Samurai. I don’t see any short-term catalysts toppling the housing market. Although, it’s not an asset class I’ll be jumping into anytime soon.
Very insightful article. I still remember the 2005/2006 prices in my area, and to see the current prices (2016-2017) at that pre-bubble level (I still live here) told me that something wasn’t right. In my ignorance, I thought that it might have just been…inflation? Ha! Malarkey!
Those are keen observations, but I don’t think housing price tells the whole story. Take historic rates into account. 5-year averages in 2008 and 2016 are 6.06% and 3.86% respectively. Mortgage payment on the latter is 22% less than the equivalent mortgage in 2008. Also consider that due to the lower rates, people just aren’t taking risks on ARMs as readily as they were pre-bubble. The risk of mass defaults isn’t quite what it was, so I’m skeptical of a crash in the near term. I think, in all likelihood, we’ll see more of a stalling of prices or even a slight dip in prices as interest rates go back up over the next few years.
I have been in Realeaste for 20+years owning 12 rental houses and doing flips and rehabs. What is going on is the banks have set another trap for stupid people to fall into again. Yes 100% there will be another melt down and it will be the worst one up till this point. I live in Dallas,Texas and this market has been ruined from out of state people from California coming in running from the mess that is there. Don’t know when this may take place but people are buying houses they can’t afford and they will suffer the high property taxes and insurance. People don’t realize the price of the house can put you under water and your stuck. But instead looking at the interest rate not vary smart.
YAY!!! I can’t wait for this mess to unfold!!
The economy is going to collapse.. people won’t have work.. and the mortgages you bought for 3 percent and thought you can pay off in 30 YEARS becomes a joke. The banks and goverment will use your money to pay off the debts they all owe when interest rates rise.. They’re receiving the funding by selling you mortgages knowing damn well you won’t be able to make payments for the next 30 years.. 30 years!! that’s a pipe dream especially with the high mortgage payment you stuck yourself with and the shitty economy were already in with robots taking over. Wake up
Heck yes! All of my crap is paid off anyway!!
I can’t wait for the real estate crash 2.0. Been living in a rent controlled property for 10 years. Can’t wait to get a huge discount by going all in on a foreclosure. The next part of my life (without a rent or mortgage payment), is gonna be sweet.
You must factor in the fact the many throughout cities purchased about 2010-2013 and sold during prior to 2014. These people then used the proceeds to purchase at higher prices thereby increasing overall housing prices. Trust me, I had a townhouse near San Fran purchased in 2011 and sold in 2013 for almost double what was paid. These homes are now about $330,000 more than what I originally invested. Proceeds used to purchase new homes in major cities is fueling the housing market coupled with record low interest rates. GL
That is a different observation I haven’t thought about. I can definitely see how having inflated equity in a relatively short period of time (combo of historically low prices, and rebounding values). I check Zillow frequently and there is MUCH less activity than in 2008-2012. I wonder if that is part of what is causing a possible bubble…less inventory (bc slower equity makes people less likely to sell), despite continued population growth in many areas.
Los Angeles market is wayyyy past the highes of 2008 and the worse part is the prices are increasing even more on a monthly basis. I think there is a lot of cash out there from stock market gains, and/or people selling previous foreclosure properties with huge profits. So rather than pay capitol gains taxes they are investing in the housing sector. So the choice is overpay for a house that u will keep or pay Uncle Sam for the profits made. It’s an easy choice and until all those profits are spent or the stock market crashes ($26k??) housing prices will continue to rise. The prices rising invites large groups of investors to keep flipping… the notion that population is the cause is not correct and just an excuse… people are born and people die so the population does not change enough to cause a shortage in housing… the only other cause besides no jobs, super inflation, rising interest rates , or stock market crash is god forbid another 911 incident or some crazy country leader start wars with nucs…. either way there will be a correction at the very least and the bubble bursting is. It that far away…. the housing market is the exact same way it was in 2006 with 39 offers on every house…..do I want a crash?? YESSSS!!!!!! Ready to move up in home size but these prices are plain stupid !!!! Good luck people and be careful…. buying now is considering late money to bail out the flippers…
What we really need is massive tax increase on rental income. The low availablity that is driving these prices to some extent is being held up by the staggering number of rentals (and the insane rent prices…). People are supposed to own and live in these houses… Houses they could afford if major (and minor!) rent tycoons weren’t abusing unfair tax laws to keep them out of reach. A day of reckoning is coming and I can’t wait for all of these groups and individuals holding many properties to lose big… Hopefully sooner than later!
Wishing for ones financial demise is a bit alarming.
Either way there will not be a crash anytime in next few years. Economy is too strong due to the Trump effect, tax law, and more stringent lending requirements prior to 2017.
Stock pile cash and be ready to buy in 3-5 years. Window will be short (1 yr) but still a window. And correction will only be 15%. Then when 2030 and beyond hit…lookout. But that’s a story for a different day.
Why would the window be short?
There shouldn’t even be taxes on rental income…or any capital gains. That money put up was previously taxed income and doesn’t need double taxation. Investing should be rewarded. But oh no, big burdensome mortgages, business losses, kid expenses are rewarded.
People aren’t supposed to own and live in houses they aren’t the highest bidders on.
The world is screwed plain and simple. Buy MREs
I think what Matt is trying to say is 2030 and beyond will be the “great property transfer” of baby boomers. who will ll be heading for the exits at the same time. The one year year window between 2020-2023 is just a quick correction due to overpriced listings.
I am a Real Estate Broker in San Bernardino mountains -Lake Arrowhead. I am starting to see a movement towards a market plateau now. The interesting thing is, one neighborhood can have 20+% gains in the last 12 months and another neighborhood have not made any gains since the Recession? The market is slowly moving from a seller’s market to Buyer’s market. Expect a correction in real estate prices by next spring in some areas in So. California.
Incomes are going up 2-5% annually, when buyers liquidate their savings getting a return if lucky at 10% and dump it into a home that’s rising at 14%. Then something must give. If housing increases at this pace, eventually the people who can afford it will decrease, even in a great economy, the breaks are set on return. Housing unlike the stock market requires a single family to feed it. The stock market requires corporate returns from multiple sources. When someone looses their job, they need to dump their house or find another job.
Before the housing market crashed I was looking to upgrade into a larger home. I didn’t want to be house poor so I was saving to make a large down payment. I would save $2,000 only to find the price had gone up $5,000. I had pretty much given up but ran across a forecloser while looking for a park. I got a great deal. I bought it for $113,000 less than it had previously appraised. I also bought another home at a,great deal. I’ve rented one all this time to make the mortgage payment and close to having it paid off and being completely debit free. I was able to give my oldest daughter the home I lived in before I bought during the crash. I would like to make money off real estate again but I’m seeing the same as I did before the crash. The properties are over valued.
I hadn’t thought about the baby boomers exiting the market. Since I read that post I’ve noticed most of my neighbors are baby boomers. Might be some deals here during 2020-2030.
>Real median income in the U.S. is not much more today than it was in 2007 (or 1999).
This claim is incomplete and misleading. Median incomes are flat only when you track HOUSEHOLD income. When you track INDIVIDUAL INCOME the rates have more than kept up with inflation.
The confusion comes about because there are two different data sets: (a) HOUSEHOLD income data comes from Census data (which tracks groups of people). (b) INDIVIDUAL INCOME tracks, uh, individuals and comes from IRS data.
just stop and think about it: do you know any INDIVIDUALS whose salary has remained flat for almost 20 years? probably not. because as a general rule, individual income rates more than keep up with inflation. and people who never get raises tend to leave their jobs.
Real median income means it’s adjusted for inflation. So of course people make more today than 10 years ago, but adjusted for inflation it’s only by a smidge.
Good article. Been looking for a home in GR and its reached absurd levels. There are simply no homes for sale. Investors have driven prices up considerably. I hate wishing for a recession bit it would be nice to see a normal market instead of 15 bids on every home i look at. Home prices cannot increase 10-20% every yr. Something eventually breaks. GR is filled with just “ok” jobs. Google didn’t move to GR. Kind of hard to understand how we got here AGAIN.
im not as sophisticated as so many that I am reading, but I am thinking about buying and I can do 20% but I was looking at scenarios of 10%-15% down and PMI, which would be paid off in 2-5 years and I can afford the monthly with PMI, so wouldn’t I be better off doing that and keeping some of the cash even though it is liquid savings only getting 2.35 interest. It’s horse property so I could improve the horse facilities and a few things around the home to make it appreciate faster… Im just trying to understand why PMI is so bad if it is removed in 5 years and allows some cash for improving on the home…? If there is indeed a crash, then I lost 20% instead of 10%… Am I crazy? Should I do 20% down? I don’t have much else in the way of cash flow, so wanted to be smart about the amount of my down payment.
I am in California, if that makes a difference.
That was a very mandatory thing.
I’m thinking in selling at 300k but if the values goes not more down by 30% it might be still better keep it because I will end up paying more than profit margin in renting!
I bought in March 2005 at the age of 19 years old. If you can believe a bank gave me a mortgage 8 months out of high school! I started a business in high school and was very fortunate to have early success in life. Boy did this all back fire on me buying in 2005. I ended up giving the house back to the bank oct 2010. Fast forward 2019 almost 15 years later from buying my first place I feel like the real estate and the economy is all based off debt! Unfortunately our country has not learned from artificial propping up of the market and living beyond our means. The next crash is the everything bubble! I know it’s coming and I’m glad that myself and I hope others will be in a position to purchase a house at blue light sale prices. It disgusts me that most people aren’t educated enough about debt and living within there means. I feel for all the families and the general population that will feel the soon effects from this massacre of a crash that is coming!
What am I gonna do with my 200K in my saving from my home sale in 2018. Would like to see another tumble so I could set my foot back in the housing market heh.
Do place it in a 6 month CD or money market and wait for the market dip soon to take place. I am in the same situation as you and many wise buyers!