I am going to talk about 1) First Time Home Buyers 2) Current Home Owners 3) Real Estate Investors
Lets just say for arguments sake (and for the sake of this video really) that the housing bubble does pop. How will you be affected?
Before I get into these groups, there are a couple concepts you need to understand. The first thing to look at is the length of the downturn. This means the time it takes from the start of the bubble popping, to the bottom point of prices. If we look at the American Real Estate Bubble, it took about 5 years to reach the very bottom of the market. 5 Years is a long time. I made a video about it: https://youtu.be/DyQUUqKBIqE
The second thing you need to understand is being stuck in a mortgage because of a downturn in the real estate market. What this means is that if you buy a home near the peak of the bubble (let’s say $600,000, but it could be any number. $300,000, 1 million, whatever), and then market then drops and your house is now worth $500,000. You cannot then sell your house because you would get $500,000 for it, but you would still owe the bank $600,000. You see? You would be about $100,000 in the hole. Is there a bubble: https://youtu.be/c-ktIPtE4E4
Ok cool. Now you get that stuff and we can proceed!
First Time Home Buyers:
Let’s say you are a first time home buyer and you need to buy a house and can’t wait for the market to completely bottom out. Here are some things that I would do.
1) Make sure that you can easily afford the mortgage. Don’t get a mortgage that is at the top of your budget. Why? Because if interest rates rise, you need a buffer to keep you safe. A 1% jump in interest could be hundreds of dollars a month, and thousands of dollars a year extra. (check out an online mortgage calculator and see for yourself).
2) Make sure you will be happy for the next 5-10 years in the house you are buying. Why? If the market continues in drop you will most likely not be able to sell your house because you will owe more on the mortgage than what you will get from the sale.
3) Try to make sure that you are in a career that will still be paying the bills in 5-10 years. Why? Again, if the market continues to drop and you lose your job, you won’t be able to sell your house and downsize because you will owe more on the mortgage than you will get in the sale.
What it boils down to is that it is kinda dangerous buying at the top of the market. In fact, if the market does take a tumble, anyone who bought near the top (like in the last 2-4 years) needs to keep their job, hope interest rates don’t go up, and make sure they don’t have any more kids because if the market drops they won’t be able to buy a bigger home.
People Who Already Own a Home:
As a homeowner in this hot real estate market, you might be thinking of how you could cash in. And there are a few ways that people are trying to do so.
1) Selling and then renting. The hope here is that you sell your home while the market is still hot and you can get a bunch of money for it, and then you rent until the market drops. The classic sell high, buy low. The problem you might come across is the market might take a while to totally bottom out. So you have to weigh where you think the market will land in 5 years, and then calculate the rent you might have to pay waiting for the market to bottom out.
2) Selling and moving to a less expensive area. This could actually be a pretty good play for some people. Some of the people doing this are close to retirement and don’t care about being close to a job. Others aren’t necessarily close to retirement, but can’t pass up the opportunity to sell a million dollar house in a bigger city and then buy for a fraction of that in a smaller community.
So if you own your home there are ways to capitalize on this craziness in the real estate market, but you still have to be careful about how you do it.
Real Estate Investors: And lastly we have people that invest in real estate. Are you guys still buying real estate? Shiiiiiiiiiiiiiiiiii….