The current housing crisis has definitely changed the "rules" of home buying. As a result, home buyers in this country have become increasingly confused and frustrated. Many people simply don't know how we got to this point, what the housing crisis means to them, and where we are headed in the future.
I can't help with the future aspect of it -- my crystal ball is broken at the moment. But I can help you understand the history of our housing crisis and how it affects you in the present. Let's start by taking a look back...
Real estate is a perpetual cycle of ups and downs. But once in a while, certain factors combine to create a "perfect storm" of housing bust. This is what we saw at the end of 2008. But while many factors have led to our housing crisis, most economists point their fingers at one cause above all others -- the subprime mortgage market.
As the name implies, a "subprime" loan is one given to a person with a bad credit score. Because of this low score, the borrower will not qualify for the best interest rates and will be given a rate that is below prime, hence the term subprime mortgage.
Now take this concept and multiply it many thousands of times over, and you will begin to see what caused the housing crisis in this country. Despite warnings from economists in the mid 1990s and early 2000s, these subprime loans were given out in staggering numbers.
Often, the lenders would downplay the risks associated with them, and would offer a low "teaser" rate for the first few years of the loan. After the adjustment period, however, the interest rate on the loan would skyrocket. Many people found they could no longer afford their mortgage payments. So then we saw record numbers of home foreclosures sweeping across the country.
This is not a post about who's to blame. But, if forced to point a finger at somebody, I would say the blame could fall equally onto three groups:
The lenders who downplayed the risks of subprime ARM loans (blinded by greed).
The federal government who looked the other way (blinded by all of those campaign contributions from the lenders).
The home buyers / borrowers who did not do enough research (blinded by the desire to own a home).
(Sorry, kind of Catty of me, but I'm tired of Realtors taking all the blame :-)
What Can you Do?
I frequently get emails from people who say something like this: "I have bad credit but I want to buy a home. How should I go about it?" In other words, these people are asking how to get a subprime loan. Evidently, they do not watch or read the news.
My response to such questions is always the same -- don't do it! Buying a home with bad credit is virtually impossible right now. And even if it were possible, it would be the worst financial move you could make in this economy. People with bad credit should "hunker down" and focus on improving their credit scores before they do anything else. Wait until you have the kind of credit score that will allow you to qualify for a loan, and to get a decent interest rate on that loan.
Good Deals for Buyers With Great Credit
But what about home buyers who have excellent credit? Ah, now we are getting to the ray of light in all of this gloom. If you have solid credit, you could actually benefit from the effects of the housing crisis explained previously.
As we discussed, there are fewer buyers today because of the tighter lending standards. People are having trouble qualifying for mortgages. There are also more homes on the market, because so many homeowners have to sell in order to avoid foreclosure. High supply and low demand creates a buyer's market, and this is exactly what we are seeing in many cities across the U.S.
So if you are a buyer with excellent credit, you could get a good deal on a home right now. Of course, no one can predict what will happen to the value of the home after you buy it. But at least now you can go into it with a better understanding of how the housing crisis affects you.