Home prices have been rising. If you're a potential homebuyer, you may be wondering how to protect yourself against getting caught in a housing bubble.
When a housing bubble pops, it can be painful. Just ask anyone with a home loan after the financial crisis of 2007 who saw their home value drop so fast that they defaulted on their mortgage or had to take out a second mortgage.
That “pop” is when home prices sink quickly, causing a home loan to be much higher than a home’s value. A homeowner is then underwater on their mortgage, meaning they owe more than their home is worth.
For now, home prices continue rising. Is that enough to consider the U.S. in a housing bubble? When will it pop? Here are some things home buyers and owners can look to in protecting their future or existing homes from a housing bubble:
Is the economy growing?
Even if home prices are out of reach for a lot of people, a growing economy can be a good sign. If it’s not growing and housing prices are still rising, then it could be a sign of a housing bubble.
The good news is that jobs are growing and interest rates remain low despite recent and planned interest rate increases by the Federal Reserve.
If you’re not concerned about losing your job and expect your income to rise, then buying a home — even as home prices rise — shouldn’t worry you if you can afford your home.
You don’t plan to move
If you’re buying a home as a place to live for the next 10 years, and you expect your income to be steady, then you shouldn’t have to worry about a housing bubble.
But if you’re buying a house as you watch housing prices climb so you can make some money off it in a year or so as a house flipper, then a housing bubble could hurt you and make it difficult to recoup your investment.
“If you’re a homeowner, living in your home, you can afford the payment, and you don’t expect to sell for the next seven to 10 years, then you should just sit tight and ride it out,” says Karen Hanover, CEO of Karen Hanover Productions, of a housing bubble. “Your property value isn’t really significant for you unless you need the equity or need to move.”
Hanover owned more than $7 million in property and lost all of it in the last housing bubble, and has since recovered.
Too many people think about buying a house as an investment first, and then as a home, says Bradford Daniel Creger, president and CEO of Total Financial Resource Group in Glendale, CA. A financial advisor who counsels clients on home buying, Creger says that thinking is backwards, and only as an investment later if retirement investments haven’t grown as much as they hoped for.
“If someone is buying a house with the intention of making it their home, they shouldn’t worry about if we are in a bubble,” Creger says. “If the person buying a house is doing it for speculation as an investor then the question of a housing bubble is much more relevant.”
Stable home prices are important in deciding to buy, he says, but much less for someone looking to live there for years.
Take some equity out when you can
When home prices are rising, it can be a good time to pull some equity out of a home — if you have some.
“If you have some equity and foresee that you may have some significant life changes, then you may wish to consider pulling some of that equity out,” Hanover says.
“As values are expected to decline, your best bet is to bite the bullet and take out a second loan” instead of a home equity line of credit, or HELOC, she says.
“Simply put the money in the bank or invest it in something liquid knowing you may pay more for the money than you earned but at least you have it for a rainy day,” Hanover says.
Buy a home where the jobs are
If you buy a house during rapidly-appreciating markets in the suburbs that’s far from employment and business centers, you may be more vulnerable to a housing bubble when it bursts, says Greg Stephens, senior vice president of compliance and chief appraiser at Metro-West Appraisal Co., a real estate appraisal firm.
Bidding wars for homes that push pries in a market to record highs can leave those homes vulnerable to being over-priced if the market soon falls, Stephens says.
“When real estate markets begin to turn downwards, the properties experiencing the least impact are those located in close proximity to employment centers and major business centers,” he says.
“Those properties that are located the furthest distance from the employment centers and major business hubs are the first to be impacted historically and to also experience the greatest sales price declines and longer recovery periods,” Stephens says.