No matter how rosy things look for homeowners today, a quick look at the history will tell us that what goes up also comes down at the same pace.
How do we know that the dramatic rise in US housing prices can’t be sustained and a housing market crash might be just around the corner? There are two answers, common sense and history.
Common sense informs us that something will give. It may be that as more people sell their homes, inventories open, leading to a large supply keeping pace with demand, thereby driving down prices.
Also read: End of the Housing Bubble? 13 Predictors of a Housing Market Crash
Prices can also hit a tipping point. Homebuyers usually, at this point, anxious to save money, will lose interest when high prices eat up all their possible savings.
One of the most dynamic sectors is the housing market. The housing market is lucrative as it addresses a human need, shelter.
Hence individuals like Donald Trump have made billions of dollars in the housing sector. Despite the high chances of profit, the housing market can crash.
A housing market crash is a drop in the total value of the whole market. If housing prices drop, investors will flee the market incurring huge losses.
Also read: Must Watch Indicators for Real Estate Investors to Warn of a Housing Market Crash
Having said this, if anyone tells you that they can predict housing market crashes accurately, check to see what they are selling.
Attempting to figure out when housing prices will flatten is a guessing game, with many pieces moving that change daily.
Strategies to Protect Yourself From a Housing Market Crash
In case you are an investor looking for ways to cover your financial investments or even if you are looking to hop on into the housing market soon, make sure to keep these seven points in mind.
We have suggested ways to help you protect yourself from a real housing market crash.
Create a Budget to Determine Your Financial Buying Power
Don’t get caught up in all the buying frenzy. If you pay much more than the house is worth, you are more likely to be underwater when the market corrects itself.
Calculating your budget helps you determine the amount of money you can afford to buy a house.
People often get influenced by their real estate agents or their mortgage lenders.
Also read: Reasons to Now Fear the Pain of Housing Market Prices Fall
This results in purchasing a house that you can hardly afford. When the housing market crashes, the house will lose its value, placing you in deep financial trouble.
Therefore, rule number of protecting yourself from a housing market crash any day is to follow a budget that’s made for you. This can be a full payment or mortgage payment.
This budget should also include other maintenance costs.
Offer the Largest Down Payment Possible
The bigger your down payment, the greater your home equity will be. Sometimes, equity is all that is there that stands behind a homeowner and foreclosure when things get tough.
Also, large down payments make you a less risky borrower.
A less risky borrower can avail of a lower interest rate. Low rates can help you save on monthly payments and pay less interest in the loan’s lifespan.
Again, all mortgage loans have incentives to attract home buyers. One of the very commonly used incentives is the zero-down payment method.
Also read: Housing Market Prices: Big Reasons Inflation Could Lead to Prices Dropping
You get a loan to purchase your house with no investment.
Thus, the loan providers will own the house. If the housing market crashes, they will promptly sell it to cover your repayments. Avoid such arrangements.
Switch to Fixed Mortgage Rates
Many people rely on mortgages to buy a home.
They act as financial vehicles to live in a house. People are priced by paying installments for a certain number of years. Once they are done, the house becomes theirs.
There are two main types of mortgage rates. There’s the fixed rate and then the adjustable rate. If rates are on the rise, then you pay more money for your installments.
Also read: Realtor.com Housing Market Predictions Sees Falling Real Estate Prices
On the other side, a fixed-rate mortgage is where the interest rate is fixed.
It does not change no matter what the market conditions are. Opt for a fixed mortgage rate to protect yourself from a housing market crash.
Conduct a Rating Analysis of Your Savings Bank
As soon as you begin earning, it is critical to save some money.
You move to open a special savings account in a bank. These financial institutions can host your savings and even offer growth in your balance at a particular rate.
Banks normally make a tremendous investment in housing. Therefore, if the market crashes, banks would go down as well.
To protect your savings while there is a housing market crash, assess your savings account with professional analysis ratings.
Build an Emergency Fund
The rule of thumb is to put away enough money to cover a minimum of six months of expenses so that you are better prepared for emergencies.
Depending on the comfort level you are accustomed to, you may want to shoot for a bigger emergency fund.
Your emergency fund is your backup cover against an unexpected fall in income, a cushion to fall back on.
An important factor to include when building your emergency corpus is that it should be easily accessible and available to you.
Refinancing Can Help You Save
Housing prices are indicative of many things; this includes the economy. If you know that the market cannot be up in value forever, you can plan or be ready for the day it crashes.
You can not only pull out more money than ever, but they can get all of it at a lower interest rate.
Also read: JP Morgan US Housing Market Report: Insight Into Where the Market is Headed
This can result in savings for you. Keeping the loan to value ratio lower offers safety in the event of a marker correction while still allowing you to take advantage of the current market opportunities.
Refinancing your existing mortgage can help at times like a housing market crash.
Know When To Buy, Know When To Rent A House
Houses are some of the assets known for long-term ownership. Most people stay in their homes for more than a decade after purchase.
However, there’s also an option to rent out the house. This is where we pay rent to continue to live there.
To protect yourself from a housing market crash, don’t buy if you do not intend to live in it for more than 5 years. Suppose you expect to live in a city where you will be around for less than 5 years, rent out a house instead of buying.
Mainly because the money spent during your purchase will only be recovered five years later, and this would be too late for you.
Housing Market Crash: History can Repeats Itself
The 19th-century housing market crash, the great depression, and the 2008 housing bubble – are just a few examples of housing prices climbing to historical figures, only to crash back to realistic values.
The housing market crash may or may not happen; it may be lighter than the great depression. No one knows, what we can control is how prepared we are.
More Articles From Tim Thomas Partners
- Planning for Paradise: 25 Things to do in Hawaii
- Essential Things You Should Know About Biden’s First Time Home Buyer Grant Program
- Warning Signs a Big Housing Market Crash is Just Around the Corner
- Dividend Kings Stocks That You Should Add to Your Watchlist Right Now
Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Learn how to diversify and hedge your long-only stock portfolio. Sign up for a free insight into the Swing Trading 101 program developed over thousands of hours of trading over hundreds of thousands of dollars across stock, commodities, options, and cryptocurrencies. It’s designed to empower you to take a unique but strategic approach to the markets. Learn more about swing trading.
Tim Thomas has investments in real estate.
This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited.
Featured image credit: Shutterstock.