Full Disclosure: This article is mostly written from my opinion mixed with some facts. I would like to think I am using an “educated” opinion to elaborate on my thoughts. I do encourage debate and would love to hear your opinion. After all, none of us know what will happen in the future so let’s respect each other’s thoughts. (:
At this point, everyone in my generation (ages 20-30) can collectively agree that the housing market, as well as the economy, crashed in 2008. I think it is also safe to add that we had absolutely nothing to do with it. With that being said, life goes on, the markets got better and here we are today. The scary part: we still don’t know what the f***k is going on! Here we are growing up, expected to do “adult” things like GET A JOB and BUY A HOUSE with pretty much no education or guidance on how or when to do so. (Mind you, all of our adult mentors who should be advising us on how and when to buy a house, most likely had a part in the housing disaster of 2008.) So how do we do this whole “adulting” thing without following the path of our elders? What do we do differently that will stop another disaster from happening? Well, that’s not what this article is about, although I still will share my thoughts on how to do so at the end. All I can do is give you the facts that I know and what I think and how I got to that thought. SO here we go.
Side note: Despite what other generations might think, the way we “youngins” live our lives & think about growing up is not our faults. It’s a series of careless actions from powerful, political, figures (in the older generations) that has made all the difference.
How the crash happened
So if you’ve seen the movie “The Big Short” you could have a good idea as to what happened 10 years ago. Or you could be just as confused about it than you were before. If you haven’t seen it and are interested in what happened, watch it. It’s on Netflix. I’m going to try to simplify things a little bit for you even more than they did in the movie. Before 1970’s-ish, when you got a mortgage from a bank for you home, that bank basically owned your home until you paid them back. Around the 80’s and 90’s big banks were buying mortgages from smaller banks and grouping them and rating them based on how “good” (unlikely they are to go to foreclosure) they are. 2000’s hit and now investment banks are buying these groups of mortgages and trading them as public stocks based on the ratings they were given. In 2005-2007 there was a craze in the mortgage world and it was in the form of subprime loans. A subprime loan is a loan given to an underqualified borrower. Basically, mortgage brokers were giving loans to people who could not afford them and making tons of money off doing so. It doesn’t end there. Now the small banks were selling these subprime loans to big banks. The big banks were grouping them together and giving them A+ ratings (labeling them as non-risky investments) and investment banks were trading them. Long story short, a lot of these subprime loans eventually defaulted because the borrower was unqualified to pay it back to begin with. This caused a domino effect of devastation leading to the crash of 2008.
Market trends: What they are & how they work
A market trend is a perceived tendency of financial markets to move in a particular direction over time.
Any and every market has trends. The housing market, the stock market, iPhone market, coffee shop market, etc. Usually, all markets have one shape in common and it looks like this. It goes up and down while simultaneously and continually going up in a volatile manner. Think of the picture below as a representation of the housing market from 1950 to now. There are ups and downs while the line is steadily moving up. It is important to first know that we are currently on an upswing. Now, it’s hard to grasp because time moves slowly and we can’t picture ourselves on this chart through our everyday lives, but we are there. Ask any economist, in reference to markets and they will tell you – what goes up MUST come down. How and why these markets move the way they do unique to each market. So I will fill you in on the factors of the real estate market.
When the housing market is going up, there are multiple factors that are all relative.
- Money is cheap. The government controls the interest rates and when they are low, people are approved for higher amounts of money.
- Because money is cheap, there are more people able to borrow.
- Because there are more borrowers, there are more buyers (higher demand)
- Because there is a higher demand, prices go up
- When prices go up the market goes up, people think they will continue to go up so they want to buy real estate before it gets too expensive
- Because so many people are buying, more people are selling at higher and higher prices.
- This process continues until the government intervenes and heightens interest rates.
When the government heightens interest rates, the cycle starts to come down.
- Interest rates start to get higher, money is expensive and people borrow less.
- There are fewer borrowers, which means there are fewer buyers.
- When there are fewer buyers, there is less of a demand and more of a supply.
- To get rid of the excess supply, builders and investors sell their properties for less.
- When higher end properties sell for less, it makes all other properties sell for less because the market is based on comparable sales.
- When properties sell for less, people that bought their house in a high mortgage are now upside down. Meaning they owe the bank more than their home is currently worth on the market.
- When people are upside down on their mortgage, the default on their loan. Otherwise known as foreclosure.
- When a home goes into foreclosure, the bank now owns it and sells it for way less than it’s worth. Again, making other homes sell for less because of comparable sales.
- This cycle continues until the government intervenes and lowers interest rates again.
The term “real estate bubble” comes from the action of the market going up. It’s inflating. When the bubble “pops” the market will fall down. So on the graph to the left, picture a bubble in the open space below the red and blue lines.
My prediction with our current real estate bubble
With factors such as low-interest rates and a high demand of buyers with large loan amounts, it is safe to say that we are in a high real estate market. As we discussed in the paragraphs above, I think it is also safe to assume that we are in a real estate bubble which will surely pop at some point in the future. When and how is the biggest question. Here are my thoughts on when and how I think it will happen. I am 23, and the majority of my peers have just recently graduated college. They have set out to find their careers and hopefully, have some sort of job security. Sadly, it is hard to find nowadays. People are easily replaced in Corporate America by the next generation of cheap, entry level employees. Job security is slowly becoming extinct. So what are all us young adults supposed to do if we cannot keep a job and we also most likely have a heavy burden of student debt on our backs? And now we are also expected to be the next generation to buy real estate? How will we possibly be able to get a mortgage if we can’t pay off our student debt which is affecting our “debt-income ratio” (our income compared to the amount of credit we are currently using)? Also, most of our loans are unforgivable meaning we can’t even look to bankruptcy to eventually be wiped clean of student debt and start fresh. Our credit score is sunk and we are renting, living paycheck to paycheck to barely survive. As the younger generations graduate college and enter the workforce, I see the debt amounts and cost of living increasing and the job security and entry level salaries staying stagnant. This is where the demand of home buyers will slowly diminish and the supply of homes will outway. As explained above this will cause house prices to drop.
How do we stop this from happening? Stop pushing young adults to take on MASSIVE debts in order to get a degree that will have a slim chance of giving them a reliable career. NOW – I am not saying all degrees are trash and that college and higher education is bad. It is not. Just know what you’re going to do with that degree. Use that degree as a tool, not an answer. Have a plan and set forth looking at all possible paths before choosing one. I said this in the beginning but I will say it again. This is my opinion. Will this happen? Maybe, maybe not. But I have spent the last 3 years studying real estate from all angles and having fresh eyes on the situation, this is my prediction. I would love to hear an opposing idea or opinion simply because I love to learn new things so if there is something I am missing or if you simply disagree, please share. My goal is to simply help educate those who are lost or confused about the subject of real estate at a young age.
Thanks for reading.