Buying a Home During the Housing Crisis
Reader Question: We want to buy a house in the near future, but we are troubled by the news about the economic crisis in this country. What should we know about buying a home during the housing crisis we are experiencing?
We have been receiving questions like this a lot lately, so I'm happy to answer it for you and other readers of this blog. Instead of overwhelming you with the history of the housing crisis and other economic background, I'll focus on three of the most important things you should know when buying a home during this financial crisis we are in:
1. You have a lot of leverage when buying in this economy.
2. You need a very good credit score to get a mortgage loan.
3. You may see your house values drop in the short term after you buy.
Let's examine these items one at a time:
Supply and demand are the primary forces that determine where a particular area is considered a buyer's market or a seller's market. Right now there are a lot off homes for sale, partly due to all of the foreclosures (and people who sold to avoid foreclosure).
On top of that, there is a shortage of qualified home buyers right now. A lot of financial institutions have failed already. And those lenders that have survived are much stricter with their lending criteria, requiring higher credit scores among other things.
So in most places across the U.S., the current housing crisis has increased supply (more homes) while decreasing demand (fewer buyers). As a result, those buyers who do qualify for financing have a lot of leverage when negotiating with sellers. It's certainly something to keep in mind as you move forward in your home buying process.
I touched on this issue above, and I've written an entire article on this subject, so I won't belabor the point here. Suffice it to say that buying a house during the current housing crisis will require you to have an excellent credit score, a favorable debt-to-income ratio, and other qualifying factors. Lenders giving out loans to poorly qualified borrowers is the main reason we are in this mess to begin with.
So if you want to buy a home in the current economic landscape, you will need to be highly qualified. Otherwise, you may not be approved for a mortgage loan. Of course, if you can afford to pay for a house in cash, this is a moot point. But for most buyers, it's a very real concern.
Some people refer to a "bottom" of the housing market, as if prices can only fall so far before they hit bottom and rebound. This is nonsense. Sure, every economic cycle has a top and bottom. But there is no such thing as a "hard bottom" beyond which prices can no longer fall. Because of this housing crisis, property values could continue to drop for a long time to come. Financial experts can make educated guesses on the subject, but nobody really knows what the housing market will do in 3 months, 6 months, or even 2 years from now.
This is something else to keep in mind when buying a home during a housing downturn. Sure, you might pay less for the house right now (than if you'd bought it six months ago). But what will the home be worth next year? It's hard to say.
If you plan to stay in the home for a long time, this will be less of a concern for you. It's still something to think about, though. On the other hand, if you plan to live in the home for only two or three years, this should be a big concern for you. Depending on the final effects of the housing crisis you could end up selling the home for much less than what you pay for it.
But that's how real estate works. There's always a certain amount of speculation involved with the process. Hopefully, after reading this article, your decisions will be fueled by knowledge and awareness -- in addition to speculation. Good luck with your home buying process.
Related Article:
We have been receiving questions like this a lot lately, so I'm happy to answer it for you and other readers of this blog. Instead of overwhelming you with the history of the housing crisis and other economic background, I'll focus on three of the most important things you should know when buying a home during this financial crisis we are in:
1. You have a lot of leverage when buying in this economy.
2. You need a very good credit score to get a mortgage loan.
3. You may see your house values drop in the short term after you buy.
Let's examine these items one at a time:
1. The Housing Crisis Creates a Buyer's Market
Supply and demand are the primary forces that determine where a particular area is considered a buyer's market or a seller's market. Right now there are a lot off homes for sale, partly due to all of the foreclosures (and people who sold to avoid foreclosure).
On top of that, there is a shortage of qualified home buyers right now. A lot of financial institutions have failed already. And those lenders that have survived are much stricter with their lending criteria, requiring higher credit scores among other things.
So in most places across the U.S., the current housing crisis has increased supply (more homes) while decreasing demand (fewer buyers). As a result, those buyers who do qualify for financing have a lot of leverage when negotiating with sellers. It's certainly something to keep in mind as you move forward in your home buying process.
2. You Need Better Credit Because of the Crisis
I touched on this issue above, and I've written an entire article on this subject, so I won't belabor the point here. Suffice it to say that buying a house during the current housing crisis will require you to have an excellent credit score, a favorable debt-to-income ratio, and other qualifying factors. Lenders giving out loans to poorly qualified borrowers is the main reason we are in this mess to begin with.
So if you want to buy a home in the current economic landscape, you will need to be highly qualified. Otherwise, you may not be approved for a mortgage loan. Of course, if you can afford to pay for a house in cash, this is a moot point. But for most buyers, it's a very real concern.
3. Your Home Value May Continue to Drop
Some people refer to a "bottom" of the housing market, as if prices can only fall so far before they hit bottom and rebound. This is nonsense. Sure, every economic cycle has a top and bottom. But there is no such thing as a "hard bottom" beyond which prices can no longer fall. Because of this housing crisis, property values could continue to drop for a long time to come. Financial experts can make educated guesses on the subject, but nobody really knows what the housing market will do in 3 months, 6 months, or even 2 years from now.
This is something else to keep in mind when buying a home during a housing downturn. Sure, you might pay less for the house right now (than if you'd bought it six months ago). But what will the home be worth next year? It's hard to say.
If you plan to stay in the home for a long time, this will be less of a concern for you. It's still something to think about, though. On the other hand, if you plan to live in the home for only two or three years, this should be a big concern for you. Depending on the final effects of the housing crisis you could end up selling the home for much less than what you pay for it.
But that's how real estate works. There's always a certain amount of speculation involved with the process. Hopefully, after reading this article, your decisions will be fueled by knowledge and awareness -- in addition to speculation. Good luck with your home buying process.
Related Article:
- Consider the Housing Crisis on Election Day
- Mortgage Crisis of 2007 - A Love Story
- The Credit Help Blog - Ask a Question
Labels: Economy
posted by Brandon at
8:14 AM
