As King Solomon tells us again and again in his Proverbs, wisdom is the foundation for a rich life graced by God. And one way to gain wisdom is to learn from the mistakes of the past. “Fools despise wisdom and instruction,” the king says in Proverbs 1:7. Today, with the housing market showing signs of a strong rebound, some industry watchers are seeing other signs – indicators that the market may be headed for a repeat of the great housing collapse of a few years ago. But, as some financial experts point out, very different conditions prevail in the current housing climate.
In the early years of the new millennium, housing was hot. Lenders made mortgages available to all comers, virtually without qualification, which fueled the so-called “subprime mortgage crisis.” Many offered loans with no interest, or no down payment at all. And many of these borrowers, trapped into loan arrangements they poorly understood, fell into default and, for large numbers, foreclosure. Those massive numbers of foreclosures, combined with mismanagement and outright fraud on the part of major lenders, sent the housing industry into a downward spiral that’s only recently begun to reverse.
Why the concern about a new bubble that might burst and undermine the housing recovery? Now, as then, housing markets are heating up. Home prices are rising as demand increases. Some major markets around the country are facing a severe shortage of available properties for sale. And despite the ongoing fallout from the foreclosure crisis and the days of indiscriminate lending to “subprime” borrowers, no-interest loans and no-down purchase options are appearing once again on the menu of lending options at some institutions.
But industry watchers point out that even though some of the signs are similar, there are still some major differences between conditions before the crash and the current environment. In general, mortgage-lending standards are tighter, forestalling some defaults. Mortgage applicants are different too. While pre-crash home buying was driven by unbacked borrowing, many of today’s transactions involve cash – either as full purchase prices or large down payments. Renting is a hot option too, keeping some riskier prospects out of the homebuying process –at least for now.
Interest rates now are still at historic lows. Although government intervention aims to keep them down, experts predict that they’ll be rising, reaching 4.5 percent by early 2014 – a development that may help to put the brakes on runaway housing markets. Along with limited supplies of homes for sale, that’s expected to keep conditions favorable for income property investing as Jason Hartman recommends, but also cool the indiscriminate lending that popped the last bubble. (Top imageL Flicrk/whologwhy)
The Solomon Success Team