It's been about 10 years since the housing crisis slaughtered the real estate market and forced millions of homeowners into foreclosure. And since housing has largely recovered on a national level, it's easy to chalk that calamitous bubble burst up to a confluence of unfortunate circumstances.
The reality, however, is that it's important that we all learn our lessons from the housing crisis so it doesn't happen again, either on a widespread or individual level. Here are a few important takeaways to consider if you own a home or are thinking of buying one in the future.
1. Don't take on too much house
A big reason so many homeowners got into trouble during the housing crisis was that they bought properties they couldn't swing financially. To be fair, lenders have since gotten much stricter with giving out mortgages, and these days, if you're ill-equipped to afford a given property, there's a good chance you won't be granted a home loan to finance it.
But while borrowing standards have become stricter, the possibility of taking on too much house still exists, so it may be on you, as an individual buyer, to stop yourself from getting in over your head. To this end, run some numbers. Your monthly housing expenses, including your mortgage payment, property taxes, and homeowners insurance, should not exceed 30% of your take-home pay.
If you're thinking of buying a home that will put you over that threshold, don't do it. Find a cheaper property and upsize later, when your finances are stronger. Otherwise, you'll run the risk of falling behind on your homeownership costs and losing the home you stretched your budget to buy.
2. Always have emergency savings
The fact that the housing crisis and Great Recession occurred concurrently was no coincidence. But because the U.S. economy tanked on a whole during that period, millions of Americans lost their jobs at a point when they were underwater on their mortgages.
The result? They couldn't make their home loan payments, nor could they sell their homes and recoup their initial investments. In a nutshell, they were stuck, which is why so many homes wound up in foreclosure.
While it's hard to predict when the next downturn will hit, one thing you should know is that recessions are a natural, cyclical component of our country's economy. Some recessions are short-lived, lasting just months. Others have lasted longer. The best way to protect yourself as a homeowner in light of that is to have plenty of emergency savings on hand.
Ideally, you should aim to have three to six months of essential living expenses tucked away in a savings account (not in an investment account, where you can lose money, and not tied up in investment properties, which are fairly illiquid). That way, if you do lose your job for a period of time, you'll have a means of keeping up with your homeownership costs until you're once again employed.
3. Don't assume your home's value will climb
Though home values have a tendency to climb over time, you never know when an extended downturn might cause them to plummet. As such, you really shouldn't count on selling your home for a profit unless you're planning to live in it for a number of years.
If your local housing market takes a hit three years after you move in, it could take another three years for your home to come back up to its original value and another three years for you to be in a position to sell it and make money. Plan for that possibility by having a diversified investment portfolio, and keep your credit score in good shape so that if you need access to money and borrowing against your home is off the table due to a lack of equity, you have other options.
Anyone who lived through the housing crisis knows how harrowing it was for homeowners on a whole. And while that period may be well behind us, it never hurts to be proactive in avoiding the fate that so many unfortunate homeowners faced back then.
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