Markets can turn so fast. It seems like one day the real estate slogan was, “Buy now or be priced out forever!” and the next day it was, “How do I save my home from foreclosure?” Although some homeowners suffered massive losses, other homes lost a little value but were basically fine (hi, Mom!). What gives?
The answer lies in an old fashioned slogan: “All real estate is local.” In fact, the real estate downturn wasn’t one massive collapse, but many. Let’s take a quick look at some major factors…so that if a curve ball like that comes around again, you’ll know how to hit it.
1. Widespread Mortgage Fraud
In the early 2000s, some lenders offered mortgage loans to people who didn’t understand and couldn’t afford them. This whole dirty underbelly of the mortgage business is known as “subprime lending.” As those homeowners stopped paying their mortgages, we saw a wave of foreclosures.
Don’t Be A Victim Action Step: Never take a mortgage you don’t understand.
Further Reading: Confessions of a Subprime Lender: An Insider’s Tale of Fraud, Greed, and Ignorance, by Richard Bitner.
2. Rampant Speculation
Although it felt like bidding wars took place in a lot of different cities, there was something special about places like Las Vegas and Miami – the new condos just kept coming, and investors just kept paying more…until they didn’t. The last investors were left holding properties that they never intended to own long-term. The worst of this crisis (and half of all mortgage defaults) took place in “the sand states”: California, Florida, Arizona, and Nevada.
Don’t Be A Victim Action Step: Don’t buy a home that you’re not willing to live in for at least five years.
Further Reading: The Big Short, by Michael Lewis.
3. Increasing Unemployment
The real estate market is usually good in areas where there are lots of high-paying jobs, and the market goes down when workers get pink-slipped. This is roughly what happened to Michigan, a state that is closely tied to the auto industry. The opposite is true, too: The real estate market held up pretty well in cities like Dallas, where unemployment has been lower than the national average.
Don’t Be A Victim Action Step: Before you buy a home, make sure you have an emergency fund in case you lose your job.
Further Reading: Crash Course, by Paul Ingrassia