Recent events have shown that our housing market has been in an unprecedented state of boom-mode, and it looks like we are heading into a years long period where things remain unstable. We have seen house price rises across most major markets, along with record high levels of home ownership.
However, this doesn't make what lies ahead any less dangerous. While owning your own property is clearly something many people desire, there are significant dangers associated with overvaluing houses.
If you're thinking about buying a house at present, then be very careful how much you spend and donuate to only properties that you can afford! Also, try to keep debt under control as much as possible, especially when purchasing larger items.
There's also the risk of homeowners' insurance being too optimistic when valuating homes. You want to ensure you're not paying more than necessary for coverage, but at the same time you don’t want to pay too little either.
Lastly, even if you've managed to stay within your budget thus far, do not assume that things will continue to go up forever. In fact, some experts predict a downturn coming soon.
Practice your investing skills
The house-buying market has gone crazy, which is great if you’ve got a ton of money to spend!
If you don’t have that much cash at this time, though, it’s still possible to get into the housing market via savings or credit. You just need to be prepared for years of bubble problems.
Savings are always the best strategy when buying anything – including a house. If you’re smart about it, you can buy a decent home without spending too much money. And remember, even more advanced strategies like dividend stocks and pooled investment funds offer solid returns in the long run.
You also want to make sure you understand how mortgages work. A lot of people go wrong by not knowing what their monthly payments are or how much they owe per month. Both of these things play an important part in whether they stay within budget or not!
Finally, learn your fundamentals. What makes a good neighborhood? How do people survive in bad weather? Are there easy routes to transportation or public services nearby?
These things matter to both you and your family, and they’ll help keep you stable as a resident.
Create a financial plan
The other major risk is that house prices will not be able to keep rising due to lack of affordability. If this happens, we could enter what is called a housing bubble collapse.
A housing bubble occurs when rapidly increasing home values are not matched with an increase in homeownership. In fact, many people can’t afford to buy a home because they spent all their money on buying a house.
In a healthy market, buyers outnumber sellers, but as we have seen, there has been a dramatic imbalance between supply and demand. When this happens, the price of homes rises because more and more people want to own one!
We saw something similar happen during the last real estate boom. Many experts believe that our current situation is even worse than it was back then.
So how long before we see a downturn? It's impossible to say for certain, but here are some things you should do to prepare yourself.
Set savings goals
The other major cause of debt crisis is having too much money to spend!
Many people will try to keep up with their spending by making drastic budget cuts or going into debt consolidation (paying off all your credit cards in one go). These are good initial steps, but they only postpone the problem.
You’ll eventually run out of things to cut back on or pay off all at once. That’s when you need to rethink how you use credit.
Consolidate what you can, but don’t stop buying goods and services — that would be the worst thing to do. What we really should be doing is saving more effectively!
We’ve already discussed some ways to do this here, so make sure to check those out now. Once you have saved enough money, it’s time to think about investing.
Investing in stocks, bonds, real estate, etc. is a great way to preserve the wealth you've built so far.
Consider a savings account
Even though we're in an unprecedented housing bubble, you can still maintain your financial health by choosing not to invest in or purchase anything related to real estate.
You do not need to be rich to enjoy a good quality investment. Many people have success investing in stocks or bonds, which are both considered investments.
By keeping most of your money in the form of a high-yield savings account (typically with a very low 0% interest rate), you will reap the benefits of having a large amount of money that does not require any additional resources to keep safe.
Furthermore, this way you avoid taking chances on things like buying a house, which is something that many individuals in the current housing market are doing. All too often, people lose their homes due to excessive debt and poor spending decisions.
Consider a CD or bond
The best way to shelter your money from rising house prices is by investing in either a CD (certificate of deposit) or in bonds. A CD can be spent at any time, but you will not get income from it unless you take out what you put into it!
Bonds are loans that do give off interest, but they are not like normal mortgages as they do not have an expiration date. They keep growing in value over time, so people often refer to them as “bond investments” instead.
A bond investment usually comes with conditions such as having enough savings to make additional payments, being at least 18 years old, and living within a certain distance of where you work. Sometimes there is even a requirement that you must research the company that issued the bond before buying it!
There are many different types of bonds, some more protective than others. People talk about short term, intermediate term, and long term bonds. Different types of bonds reward you for holding them for a specific amount of time.
Know your credit score
Recent developments have made it clear that we are in a real estate bubble, but what people may not know is just how long it will last before it pops.
We all know that house prices rise during bubbles, and then they collapse. What many don’t realize though, is how long it can take for this to happen. Sometimes it can be years!
When houses remain overpriced even after lots of people have bought them, it creates a lot of pressure to keep buying more and more homes. This growing demand for housing makes it even easier for someone to buy their next home. It also increases competition, as everyone wants a piece of the action.
All these factors work together to create a very strong illusion of wealth – a house price illusion. People feel rich because they own a house, so they go ahead and spend money on other expensive things like cars or furniture.
This inflated sense of prosperity is why most people who should know better continue to believe that owning a home is a great investment. But it isn’t! It's simply spending money!
It takes a while for this fake perception of wealth to burst - and when it does, it can do some serious damage.
Crash #1: The first crash happens when too many people stop paying their mortgages. At this stage, there aren’t enough homeowners left to make up for those that stopped making payments.
Prepare your house for sale
A few days before Christmas, you decide to clean out the closet and have an estate sale. You are totally organized and packed up all of your belongings in good condition. When it is time to put everything away, you realize that there isn’t anywhere to store all of these things.
You could always just pack them into the space next door, but what about all of those other people who will be going through this stuff? They will probably want to take some of these items with them, which means they would need access to the second room.
If you don’t already have a place for these things to go, you will soon! In fact, many landlords require at least a one-bedroom apartment as collateral when they agree to rent to you.
In times like these, individuals are being asked not only how much money they have, but also if they are willing to spend money now on things such as mortgages and rental deposits. Many people do not feel comfortable putting their financial situation under more scrutiny than necessary, which is why we are experiencing the same problems in our housing market right now.
The solution may very well be to stop having house parties and investing in large skylights, but I hope everyone else can enjoy the rest of the bubble while I am still able to tell you where to stick yours.
Make big financial decisions
We are now in an era where anything is possible, especially with respect to real estate. A few years ago, people would worry about whether or not the market was too hot, but these days it’s more like if there isn’t a house burning down somewhere, then something seems off!
At this point, we can officially say that the housing bubble has burst. And while some areas have cooled off (which is normal after any significant downturn), other markets remain quite frothy, which will only fuel worries about a recession.
As such, before you even think about buying a home, you should make sure your finances are in order. This includes ensuring you have enough money to pay a mortgage in the event you want to buy a house soon, as well as putting away a stable amount each month so you’re not dependent on your income – or worse, someone else’s.
Furthermore, consider how much house you need to own. You don’t need a mansion, but you do need a place to live that fits into your budget. Only once you have those two things do you need to start thinking about what kind of house you desire.
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