THE REAL ESTATE CRASH – How to Save Yourself, Your Family, and Your Home Equity

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YHSGR – The Real Estate Crash

 

THE REAL ESTATE CRASH

HOW TO SAVE YOURSELF, YOUR FAMILY, AND YOUR HOME EQUITY

 

TABLE OF CONTENTS

INTRODUCTION 4

CHAPTER 1 6

AN OVERVIEW OF THE PREVIOUS HOUSING CRASH 6

CHAPTER 2 11

CONDITIONS THAT COULD LEAD TO A COLLAPSE IN THE REAL ESTATE SECTOR 11

CHAPTER 3 16

IS A GLOBAL RECESSION IMMINENT? 16

CHAPTER 4 20

THE PERCENTAGE OF MORTGAGE DEFAULTS HAVE INCREASED FOR THE FIRST TIME SINCE THE LAST FINANCIAL CRISIS 20

CHAPTER 5 25

IS THIS THE BEST TIME TO SELL YOUR HOME DUE TO REPORTS THAT A RECESSION IS IMMINENT? 25

CHAPTER 6 30

HOW CAN A REAL ESTATE COLLAPSE BE PREVENTED? 30

CHAPTER 7 37

HOW CAN YOU SAVE YOURSELF, AND YOUR FAMILY DURING A HOUSING DOWNTURN? 37

CONCLUSION 44

INTRODUCTION

Many signs have pointed toward a global recession happening at some point in the near future. Financial analysts have predicted that this event will occur over an extended period and it will be anything but moderate. It has also been predicted that the coming recession will be more severe than the last global recession of 2008. A timeline has been set for the recession. This is probably going to be before the United States 2020 general elections.

With everyone currently focused on the dismal PMI prints of Germany, the investing public has forgotten that the United States economy is slowing down in similar fashion. This isn’t far from the truth as merely hours ago investors were reminded that the US economy is on the brink of collapse. This was when Markit published a report about the US manufacturing PMI. The report stressed that the United States PMI unexpectedly tumbled into the contraction territory.

The US PMI is down from 50.4% a position it held last month. It is missing the expectations of a 50.5% rebound. It is currently under the 50.0% expansion level for the first time. The last time such an event occurred was in September 2009. The last global recession hit the real estate sector hard. Many families lost their homes. Now there are strong signs pointing towards a similar if not worse phenomena in the future.

Mortgage defaults have risen for the first time since the 2009 global financial crisis. According to the report, an estimated 243,000 borrowers have defaulted on their first-lien mortgages in quarter 2 of this year. While the quarter which is about end certainly played a huge factor in the increase in mortgage defaults, there was a noticeable overall slowdown in default activity decline. National default rates rose by at least 3% compared to what was observed in Q2 of last year.

Recently, there have also been record lows in the bond yields (a situation that experts expect to keep going lower due to fears of a disaster scenario recession). The benchmark decade-old Treasury note yield, which affects business loans and home mortgages, has been fighting off three-year lows. It stood at 1.45% as of August 27, 2019. This figure is below the 1.5% 2-year yield and the movement since then onwards has been signaling the coming of a recession.

The three-decade Treasury bond yield also fell to record an all-time low point of 1.91% as of August 27, 2019. The yields around the globe which move opposite price dropped to record multi-year lows. The United States rates drop, is followed by a global scenario. Japan’s decade yield fell to record fresh lows and a three-year low. While, the German 10-year yield slid to a low of its own at -0.72%.

Financial experts and commentators have said that the bond market is in a vortex that is sucking in the investors who buy yield. This will keep getting lower while bond rates go higher. In the last few days of August 2019, investors have come to terms with the fact that there is a good chance that the ongoing US-China trade war could linger for a long time despite negotiations. Many fear that this could culminate on the eve of the 2020 presidential election and birth the recession.

This research focuses on the real estate sector. Hence, if a recession is imminent, it will be wise for homeowners to learn how to save their homes and equity. Obviously, avoiding the issues that can come as a result of a global recession and mortgage crash will be a good step in the right direction. So how can you avoid it? How can you survive the coming storm? Moving forward, see how to save yourself, your family, and your home equity.

CHAPTER 1

AN OVERVIEW OF THE PREVIOUS HOUSING CRASH

Majority of those who were caught up in the middle of the 2008 global recession and housing crash have been concerned that the 2017 housing bubble and the subsequent slowdown might lead to another housing crash. This seems to be the case despite the fact that crash from 2017 was caused by circumstances that are no longer in play. At the time, credit default swaps went on to insure derivatives like mortgage-backed securities.

Additionally, hedge fund managers went on to set up a huge demand for the allegedly risk-free securities. This inevitably created more demand for mortgages that backed these securities. In order to meet the demand for mortgages, both mortgage brokers and banks offered consumers home loans at the time. In the end, the subprime mortgage crisis was created in 2006.

Moving forward, as the number of unqualified buyers that were entering the market increased, the demand for mortgage soared. Many people even made buying homes investments to sell as the prices of real estate kept rising more and more. At the time, everyone exhibited irrational exuberance, which is usually the hallmark of most asset bubbles and the same for this one. In 2006, homebuilders eventually caught up with the issue of demand. And when supply eventually outpaced demand, the crash began as housing prices began to fall drastically. This situation burst the asset’s bubble.

Later on, in September of 2006 precisely, it was reported by the National Association of Realtors that home prices had dropped drastically which was the first time in more than a decade. The inventory was also high, providing an average 7.5-month supply. Moving on to the month of November, the Department of Commerce revealed that new home permits had become 28% lower than what they were in 2005. Despite all of these signs, the Fed never made any preventive measures of solutions.

The Fed actually thought that the economy had the capacity to pull the housing sector out of its current predicament. It even pointed to strong employment figures, low inflation rate and an increase in consumer spending as its reasons. The fed also promised to reduce interest rates. Which was expected to give the economy adequate liquidity to facilitate growth.

Banks, on the other hand, had to hire quant jocks to set up the new securities. They even wrote computer programs to sort out packages of mortgages that fall into either the high-risk or low-risk categories. The high-risk bundle paid more although they were likely to default. While the low-risk bundles offered a safer alternative but paid less. The bundles that were introduced held unknown sums of subprime mortgages. The banks didn’t care about borrower credit-worthiness because they resold their mortgages on a secondary market. Hence, the millions upon millions of interest-only loans became a ticking time bomb. These options allowed borrowers to enjoy lower monthly repayment plans. Although these mortgage rates, eventually reset to a higher level three years later. Many of the homeowners couldn’t pay the mortgage. Inevitably, housing prices fell. This meant that it was difficult for them to sell their homes for good enough profit. This resulted in many of them defaulting. When things were good, this didn’t matter. Everyone was able to buy the high-risk bundles. The reason is that they gave higher returns. Hence, as the housing sector declined, everyone knew the products had begun to lose value. And because no one understood the situation, the resell value of the derivatives remained unclear.

Note that the majority of the buyers of these MBS weren’t just other banks. These purchasers were individual investors, hedge funds and pension funds. This scenario spread risk through the entire economy. Hedge funds are believed to have used the derivatives as collateral to take loans or borrow funds. This ultimately created higher returns leading to a bull market although it magnified the impact of the downturn. The US SEC (the Securities and Exchange Commission) didn’t regulate hedge funds at the time, so no one really had an inclining of what was actually going on.

Although the SEC eventually realized that the hedge fund housing losses had the potential to threaten the economy. Through the summer period, banks were unwilling to borrow to each other. The financial houses were afraid of receiving a bad MBS in return. They didn’t know the sum of bad debt that they had in their books. And no one was willing to admit this because if they did, their credit rates would be lowered which will cause their stock prices to fall. They won’t be able to raise additional funds to remain in business. Hence, the US stock market see-sawed in the summer of 2006, as market-watchers were trying to determine how bad things had become.

By August of that year, credit had become very tight to the point that the Fed had to loan banks $75 billion. The goal was to restore the liquidity long enough which will give banks the opportunity to write down any losses they incurred and get back on track or to the business of borrowing money. Instead, the banks stopped lending money to almost everybody. This downward spiral that was feared imminent was already underway. Banks had to cut back mortgages, and housing prices fell even further. This eventually sent more consumers into default. And it increased the issue of bad loans on the books for banks and made banks lend even less altogether.

CHAPTER 2

CONDITIONS THAT COULD LEAD TO A COLLAPSE IN THE REAL ESTATE SECTOR

Economic collapses aren’t limited to only the stock market. The other sectors and our point of reference for this material, the housing sector, is also affected. There are a number of conditions that can lead to a collapse in the real estate industry. The housing bubble began in 2001. At the time speculators left the stock market and began to set their sights on the real estate industry. This move sent the value of home up. Eventually, housing prices began to deflate. And when this started, the majority of homeowners found that they owed more when it comes to their mortgage than the actual worth of their house.

As the issue of low introductory interest rates started to reset to higher rates, the majority of homeowners found themselves in a difficult position as they were not able to pay their mortgages. Back then foreclosures skyrocketed. The more recent collapse has been discussed in the previous chapter. Now the question is, what conditions can indicate the collapse of the real estate sector? Let us discuss some of these conditions.

US Treasury Bond Notes are Inverted

One of the warning signs that indicate that the real estate sector is on the brink of collapse is when the yield curve on the U.S. Treasury notes become inverted. This is usually the case when interest rates for the short-term Treasury’s are higher than the long-term yields. The regular short-term yields are typically lower because most investors do not necessarily require a higher return to invest for a period of under one year. When these figures invert, it automatically means that investors think that the short-term poses more risks than that of the long-term. This causes havoc within the mortgage sector and usually almost signals that a recession is imminent. Going by historical data, it has been observed that the yield curve was inverted before the recessions that hit the global economy in 1981, 1991, 2000 and 2008.

Flooding in Coastal Regions

Another drawback that can push the real estate markets into collapse is the fact that coastal regions are vulnerable to rising sea levels or flooding. According to one research, the Union of Concerned Scientists gave a prediction that at least 170 U.S. coastal regions (cities and towns) will be “chronically inundated” 20 years from now. Another study found that at least 300,000 coastal properties are going to be flooded about 26 times every year by the year 2045. And the projected value of the affected real estate per the study is a whopping $136 billion. By the year 2100, that figure is predicted to rise to as high as $1 trillion. The homes that are in high-risk regions are properties in Miami, the San Francisco Bay area and New York’s Long Island.

Flooding has reportedly hit the U.S. coastal towns about three to nine times than it did 50 years back. In recent years in Miami, Florida, the ocean usually floods the streets during high tide. Researchers from Harvard reportedly found that property prices in the lower-lying parts of Miami Beach and the Miami-Dade County are slowly rising more than the remaining parts of Florida. Another study conducted for this purpose which used Zillow found that homes or real estate in areas that are prone to rise sea levels sell for a 7% discount to the comparable homes. It has been predicted that by the year 2030, properties in the Miami Beach territory could pay as high as $17 million in property taxes as a result of flooding.

The Effects of Trump’s Tax Reforms

Another key factor that could trigger a housing crisis in the near future is the Trump tax reform plan. Experts and financial commentators speculate that this initiative could be negatively affecting the housing industry. Why did they reach this conclusion? The tax reforms initiated by the Trump-led administration has increased the standard deduction. This means that many Americans have no need to itemize as was the case before now. As a result, they won’t be able to enjoy the mortgage interest deduction initiative. Trump’s tax plan has been described as a $71 billion federal subsidy pumped to the real estate sector. The real estate industry for its part has outrightly opposed Trump’s tax plan.

Risky Investments by Banks and Hedge Funds

There has also been speculation that the real estate market might collapse if hedge funds and banks go back into making investments in high-risk financial products. Going by history, such moves were part of the real causes of the major housing or financial crisis. At the time, banks sliced up mortgages, then resold them as mortgage-backed securities. The securities offered financial institutions bigger businesses than the actual mortgages. In a bid to meet up, these banks sold the mortgage-backed securities to anyone. The reason was that they needed the buyers to support their derivatives. It was a flawed business plan. They sliced the derivatives up so that the bad mortgages stayed hidden in bundles with the good ones. Eventually, when borrowers defaulted, the derivatives were regarded as bad.

Higher Interest Rates

It is no secret that the issue of higher interest rates has resulted in several reports of the housing collapse in the past few years. High-interest rates make loans more expensive. Which in turn slows down home building and inevitably decreases home supply. This initiative also slows lending as well which in turn cuts back on demand. All in all, a slow yet steady interest rate increase isn’t going to create a catastrophe in the real estate sector. It is well-publicized that higher interest rates preceded the real estate collapse of 2006. At the time, many borrowers had adjustable-rate mortgages and interest-only loans.

Unlike the regular loans, the interest rates for interest-only loans rise alongside the fed funds rate. The majority of homeowners also had the choice of introductory teaser rates which typically reset after about three years. When the Fed (Federal Reserve) raised its interest rates at the same time the interest-only loans reset. At that point, borrowers found that they couldn’t afford the enormous payments any longer. Home prices dropped at the same time. Hence, the mortgage-holders could not make payments or sell their houses if they wanted to.

The history of the fed funds rate has shown that the Federal Reserve had the habit of raising rates too quickly. This was the case between 2004 and 2006. The fund’s rate was at 1% in June of 2004. By December of the same year, it had doubled to 2.25%. It also doubled again from to 2.25% to 4.25% by December of 2005. Within a six month period, the fed rate stood at 5.25%. It is noteworthy to mention that the Fed has opted to raise interest rates at a slower pace since the year 2015.

CHAPTER 3

IS A GLOBAL RECESSION IMMINENT?

After nearly a decade of sustained growth, it appears that the global economy has recovered fully from the Great Recession of 2008. Many financial experts have expressed concerns that a contraction might hit the global economy soon. Reports show that some of the biggest economies in the world are showing signs of a contraction. There are fears that trouble is imminent. One good example is the ongoing trade war between the two economic leaders in the world (the U.S. and China). Both superpowers have begun to feel the pain resulting from their ongoing trade war. Experts have speculated that the trade war could drag for many more months, if not years. In the month of August 2019, the U.S. indicated an “inverted yield curve.” An inverted yield curve is a complex financial metric that usually occurs just before each of the previous American recession. Even during cases of such an event in the 1950s.

For the rest of the world, the economies of Germany, Brazil, Mexico, and Italy, as well as that of a number of countries have started to show vulnerabilities. There are fears growing among many and the uncertainty surrounding the world’s economies is exacerbated by concerns over a potential financial fallout that may occur if the United Kingdom finally leaves the European Union by October 2019 without reaching a deal first with the EU based on its own terms. In general, you can declare that an economy is in an economic recession when it records at least two straight quarters where its gross domestic product is in the decline. Some governments even use more nuanced measurements to officially declare that their economy is experiencing a recession.

The current state of affairs has made financial forecasters declare that these indicators are pointing towards an imminent global recession. Although, long or short periods of contraction and expansion are a normal occurrence in all economies. A number of experts are concerned that there might be a potential cyclical downturn which could be made worse by the growing tensions between the United States and China. Issues like Brexit and the lingering effects of the past Great Recession of 2008 are other factors. Despite several signals of a global economic slowdown, a section of experts have also declared that there are some positive signs. They have cited the low unemployment rate as one factor that indicates that the world economy is still strong for now. The economic adviser of the Trump administration, Larry Kudlow has declared that “there is no economic recession in sight.”

Others have argued that even if the negative signs show that an economic recession is imminent, there is no evidence that clearly shows when it will happen. They are of the view that no signs point to how severe the recession might be if at all there will be any recession.

Here is why a Recession is Likely to Happen

There are a number of factors that will determine whether a recession will happen or not. Moving forward, the following factors could trigger a full-blown recession:

Fears Brought By the Last Great Recession

This can be tagged as a type of withdrawal syndrome. Fears that a recession will occur have been growing in recent months. According to Laura Veldkamp a Professor at the Columbia University of Finance in an interview with the Washington Post:

“If we think and fear that there will be an economic recession soon, everyone will produce a bit less as they will be anticipating a decrease in demand. Hence, the lower production will become the recession itself.”

The Ongoing Trade War between the United State and China is dragging the Rest of the World into Recession

The two largest economies in the world, Washington and Beijing have been at odds in recent months. Here is what expert David Parkinson told the Globe and Mail (Canada):

“At this point, the trade war between the United States and China is no longer a situation of ‘what if’ considering its massive impact on the trade activities across the globe, but the effects of the brewing issues between both superpowers are spreading massively in an interconnected worldwide economy.”

No-deal Brexit Could Drag the Global Economy into Recession

Back to the issue with the UK exiting the EU on its own terms via a deal, failure to achieve this could pose a threat to the global economy. The Guardian reported that:

“The economic implications of Brexit may have been specifically prepared for campaign purposes. However, doesn’t mean that they are imaginary. Every single credible analysis makes it clear that the no Brexit-deal scenario is will be the riskiest of all options.”

CHAPTER 4

THE PERCENTAGE OF MORTGAGE DEFAULTS HAVE INCREASED FOR THE FIRST TIME SINCE THE LAST FINANCIAL CRISIS

Per recent reports, the number of mortgage defaults has reportedly increased for the first time following the great financial crisis of 2008. But as the mortgage rates continue to fall, a refi increase will help millions of mortgages. An estimated 243,000 borrowers have reportedly defaulted on their first-lien mortgages in the second quarter of 2019. As for the quarter ending this past Sunday, August 31, there were a significant number of defaults. This period played a crucial factor in the increase in the number of defaults, an overall drop in default activity has also been observed. Per one study, the national default rate increased by 3% when compared to what was recorded in the second quarter of 2018. This was the first of such annual rise since the 2009 financial crisis.

Additionally, the national delinquency rate also dropped by 7% on July 2019. This offset most of June’s calendar spike. At a whopping 3.46%, July’s delinquency rate n 2019 is the least of any of record in the month of July (dating back to year 2000). Serious delinquencies (the majority of which are loans of over 90 delinquent or more not in active foreclosure) dropped under 445,000. This was the first time that such a thing occurred since June of 2006. Despite this year-over-year increase in quarter 2 in loan defaults, the overall serious delinquent inventory (that is loans of 90 or more days overdue) was down by about 17% from the previous year. This is as a result of the continued strong cure activity.

Then, the prepayment activity increased by 26% from the month of June to its highest position in nearly three years which is 58% above what it was this time last year. This was caused by falling interest rates fueling the refinance incentive. There are now about 9.7 million refinance candidates in the real estate market. Rates have fallen to at least 3.50% to record a two and a half year low for the sector. This, in turn, resulted in the most refinance option in the market since the later part of 2016.

Next Housing Market Crash is predicted to occur in 2026

According to Teo Nicholas a Professor at the Harvard Extension School, the next recession will occur in the year 2026. Nicholas said many factors have pointed toward such an outcome 26 years into the future. The college Professor bases his theory on the study carried out by economist Homer Hoyt. The study stresses that the real estate booms-and-crashes have moved in an 18-year cycle pattern since the 1800s. The only exceptions, in this case, were during the Second World War and stagflation. Back in 2017, Nicholas described the real estate sector as being in the expansion phase. He remarked that in the next phase, there won’t be any hyper supply unless the rental vacancy rates start to increase. If this occurred as the Federal Reserve raises its interest rates, there is the tendency for a crash to happen.

The 2008 real estate crash imposed a huge financial burden on the majority of US households. This is because housing prices fell by 30% nationwide. At the time roughly 1 among every 4 homeowners were pushed underwater. Which eventually lead to a whopping 7 million foreclosures. Now, nearly one decade after the real estate crash, researchers have found significant evidence that supports a mortgage scheme that could be implemented to prevent another issue of vast foreclosures should they be another real estate crisis.

Zillow Expects Next Housing Recession to Occur in 2020

The United States’ housing market could enter another recession in under just five years, according to an online real estate company. The real estate firm, Zillow, predicted that the recession will happen by the year 2020. They were able to draw this conclusion after doing research which involved polling about 100 real estate experts alongside economists about what their predictions are for the U.S. housing market. The company disclosed that about half of its survey respondents agree that the next recession will occur in the year 2020. They also agree that the first quarter of 2020 will be the most likely starting point for the recession. The main culprit when it comes to the housing recession is the country’s monetary policy.

If the predictions given by the survey respondents’ turn out to be true, the ongoing economic expansion is set to be the longest of its kind ever recorded. On the other while a collapse of the housing sector has ushered in the past Great Recessions from 2008 and 2009, the majority of survey respondents don’t believe that a downturn in the U.S. economy will be focused on the housing market alone this time. They are of the view that the Federal Reserve’s activities regarding interest rates are going to be the biggest reason that triggers the looming economic recession. After all, if the interest rates go up, it will likely be more expensive to take a mortgage, which will make remove the possibility of purchasing a mortgage for some buyers. The firm also noted that, if the Federal Reserve raises its interest rates too quickly, chances are it will make the economy slow and a recession will be inevitable.

Zillow also pointed out that, in less than one year ago, their survey respondents were focused or concerned with geopolitical matters, citing that a crisis on that front was the most likely reason behind the talks of a future recession. These concerns are now under monetary policy issues. Other concerns in this regard are basically focused on the ongoing trade war between the United States and China. We also have the stock market correction, as well as the unexpectedly high inflation levels. Those same respondents now expect the housing sector to continue to grow. Home values are expected to increase by 5.5% this year. As of this same time one year ago, real estate experts were of the view that home values would see an increase of about 3.7% this year (2019).

Real estate investments, either residential or commercial, have since been associated or tagged alongside wealth creation in the U.S. The housing crash that occurred in 2007 put a damper to this sentiment. The real estate market went on to lose about one-quarter of its value in a period of two years. Although, the housing sector has since stabilized, sales have actually been sluggish in recent months. This has been attributed to rising interest rates which isn’t surprising. During an economic recession, the value of housing (including the value of the home’s or buildings’) and its location becomes more difficult to discern. In the end, an investment can automatically become illiquid in the event that the market drops because the number of buyers is drying up, and the sellers have to know how to remain patient to avoid suffering losses of any kind.

CHAPTER 5

IS THIS THE BEST TIME TO SELL YOUR HOME DUE TO REPORTS THAT A RECESSION IS IMMINENT?

Selling your property during a recession may seem a viable option. Especially now that there is a strong possibility of a global recession happening in the near future. This can put homeowners’ on-the-fence and make them want to take a critical look at their properties. It is understandable for them to want to make dollars from these properties. Although the economic downturn has not started yet, many financial experts believe that it is only a matter of time before we experience another one. According to Robert Shiller, a Nobel-winning economist, and financial expert who predicted the previous housing crash in the U.S., there is a 50-50 chance that an economic recession will occur within the next 18 months.

The Wall Street Journal conducted a poll among several economists’. In the end, they discovered that at least 25% of the respondents believe that a recession will happen soon probably next year. While another half of the respondents think the recession will occur by 2020. When it comes to gauging what kinds of homes would likely retain and lose their value in the event that there is a recession. According to Redfin real estate brokerage firm recently did an analysis of home prices for no less than 111,000 properties. The study covered before and after the 2008 recession. In the event that a recession happens and the housing sector is affected, new avenues will be open for home sellers and buyers as well.

Whenever the recession happens if, at all it happens, it will probably pave way for a buyer’s market, in the housing sector. While not a sure thing, during an economic slowdown we may see fewer consumers looking to purchase homes. This is because they would like to continue renting properties, or because they would rather remain in their current homes until the situation stabilizes. And as the buyer’s usually gain the upper hand in such situations, home values will begin to stagnate, which will, in turn, bring down the potential profits that would-be sellers may have collected. According to the findings of several studies, single-family homes maintained their value better than the condos and townhomes or older properties. The older properties relate to those that were built before 1940. Properties in more spread out neighborhoods and two-story buildings and properties also held up their value better than condos and townhomes.

According to Daryl Fairweather, who serves as the chief economist of Redfin, homebuyers have more options and negotiating power when the economy collapses. The reason for this is because there will be more people out trying to sell their properties than there are people trying to buy buildings when the economy is already weak. This is the reason why dream homes are likely going to retain their value than condos. During a recession, home buyers will have more options than settling for condos or homes with fewer bedrooms or just a single-story building. So the homes that are less desirable will drop in value when compared to single-family homes that have two stories and more bedrooms.

How Did the Housing Market Perform During the Great Recession?

In the last decade alone, no event has really influenced the current housing structure or real estate environment than the great global economic downturn from December of 2007. During the seismic economic shift in 2007, the Great Recession, had the majority of people in myriads of unprecedented challenges. Many persons lost their homes. The University of North Carolina reportedly published a thorough treatment for the subprime mortgage crisis. It highlighted the different ways that its ripple effects reach throughout the global financial system. Both foreign and indigenous investors poured a great deal of money into the housing industry. They even offered home buyers credit with a less effective or inadequate risk management model. Hence, the combination of the rise in home prices and the easy credit would eventually lead to a rise in the overall number of subprime mortgages. And these subprime mortgages are one of the underlying causes of the Great Recession of 2007/2008.

Essentially, these subprime mortgages are defined as financial instruments that offer beneficiaries widely varying terms. The lenders offer these terms to “risky borrowers.” Who is a risky borrower? A risky borrower is someone with a questionable credit history, income stability, and high debt-to-income ratio. The subprime mortgages grew popular among home buyers at the time. It was the go-to option for homeowners looking to purchase their second homes. In fact, the lenders specifically targeted such home buyers and offered them subprime mortgages. Furthermore, the subprime mortgages, typically, have adjustable interest rates. The lenders offered the consumers back then mortgages with low-interest rates over a short period of time. However, after that short period passes, the interest rates increased by a considerable margin. In fact, the average subprime interest rate from the year 1998 to 2001 was about 3.7% points higher than the regular mortgage rates.

What Was the Aftermath of the Great Recession in the Housing Market?

The subprime mortgage collapse resulted in economic stagnation and caused many people to lose their homes. Americans faced one of the worst financial disasters at the time. Because the value of homes dropped very well below the sum that they had borrowed. Apart from that, the subprime interest rates also increased drastically. Their monthly mortgage payments nearly doubled in several parts of the country. Additionally, in many cases, the borrowers were actually defaulting their mortgage loans instead of paying more for a property that had dropped enormously in value. In turn, home building in the country and the rest of the world saw a significant downturn. This resulted in a restriction in the supply of new properties for n ever-growing population.

The increase in demand and a lack of supply saw the real estate sector automatically become a seller’s market. More and more people began to chase fewer homes. In turn, this increased the prices of properties. Today the system is different. There is good news for homebuyers in the present era. The good news is that the foundational problems caused by the Great Recession have now been addressed in the current structure of the real estate industry. U.S. policymakers and the entire financial industry have ensured that the same mistakes aren’t made twice. In a bid to stimulate economic growth, it is understood that the Federal Reserve, the institution that holds the responsibility of setting conditions to influence the rate of employment and overall economic growth, slashed its funds’ rate to almost zero. Simply put, the fund’s rate issued by the Federal Reserve is the interest rate that banks use to borrow from one another. The decision to cut down on interest costs gave consumers the opportunity to have more access to capital which in turn will be reinvested into the economy.

In the last ten years, the net effect of the near-zero interest rates has clearly stabilized the United States economy. The policy has encouraged lending among the financial institutions which is systemically crucial to the housing market, according to a study by UNC. Today, the supply and demand of the housing industry have stabilized enough to the point that we are now in a huge buyer’s market. This has caused mortgage rates to grow gradually to balance the economy. Considering these highlights about an impending recession, the question now is how can you protect yourself and save your mortgage during a housing crisis?

CHAPTER 6

HOW CAN A REAL ESTATE COLLAPSE BE PREVENTED?

It is no secret that the real estate industry and the overall economy stands out as the most essential tool in the history of the U.S. This has been the case from the first decade of this century. The century kicked off having the highest rate of inflation in housing price over the last 10 years. This figure is 4% higher than it was in 2001. The century also brought along a more plugged-in, online user base and let consumers secure mortgages in a more conducive environment that is free of the old regulations. In the later part of 1999, the FSMA (Financial Services Modernization Act) repealed the Glass-Steagall Act that it passed in the year 1932. By doing this, the new legislation formally began using regulations that kept the banking sector, securities, and insurance separate from each other.

When you mix these elements together, you will get an extended period of growth that will outpace anything seen before by a mile only to crash down in a clear case of too much, happening too fast. Now, how did the real estate industry recover from the 2007 recession and return to its current levels? What regulatory steps can stakeholders take to prevent having a repeat of the recession in history?

How it all began

During the 1990s, the prices of most homes increased at a rate of less than 3% per year. When you compare this figure to what was attained during the period starting from 2000 to 2006, when the prices of homes jumped around the country by an average of 9%, you will see a huge difference. This came at the same time with subprime mortgages. They are loans with less favorable conditions issued to borrowers who qualify for traditional mortgages due to their good credit score.

From the year 2001 to 2006, the number of subprime mortgage loans shot up from 7.2% to 20.1%. The subprime mortgage originations hit a total of $625 billion in 2005. At that time the housing boom had already started to show signs of slowing down. Then in the year 2007, as the bottom reached, government-sponsored enterprises Freddie Mac and Fannie Mae reportedly suffered a net loss of about $14.9 billion combined. This leads the Federal Housing Finance Agency to put the government-sponsored enterprises under conservatorship in September of 2008. The treasury secretary Henry Paulson said regarding conservatorship move:

“Conservatorship was the only model that would commit taxpayers’ money to the government-sponsored enterprises.”

This was the genesis of the whole recession. It was this short economic crisis that led to the recession. The recession caused a loss of about 9 million jobs between the year 2008 and 2009, per data given by the Bureau of Labor Statistics. The recession also caused a decline in the household net worth of nearly $13 trillion, according to data given by the Federal Reserve. The net-worth figures given here wouldn’t recover until 2012 end. While the job situation wasn’t really restored until the middle part of 2014.

The Comeback

Over the last decade, since the big recession, the global economy has gradually stabilized. It was last year that the housing sector managed to fully stabilize and thrive. The mortgage rates have passed its worse time as it is currently on a seven-year high. The interest rates have steadily increased as the years past. The average prices for home sale have also hit the $375,000 mark in 2019 after sinking to nearly $257,000 in 2009 during the recession. This shows that there is a lot to be happy about. But most of the people still shaken by the issues from the last recession 2009 might not celebrate without anticipating that things can change at any time. Despite the stigma associated with subprime mortgages, subprime mortgages have not necessarily vanished completely. This loan type remains a part of the housing financing landscape, although a much smaller one. This can be attributed to effective oversight and legislation over the sector over the last decade. The model requires lenders to disclose any costs and interest rates more clearly. It is essential to state that some lenders are beginning to get more creative again. They are now offering buyers who have lower credit rating loans called “nonprime.” Nonprime loans sound suspiciously familiar to subprime mortgages.

The homeownership rates in the United States has been steadily shifting to its pre-crash levels. The homeownership rates recently hit a four-year high when it reached 64.2% in gains. There are still a few first-time homebuyers who are just waiting a little longer to make their down payments. As millennials grow older and enter their 30s, they have not been transitioning into the homeownership system at the same rate their predecessors did. In the year 2016, the average age for a “typical” homebuyer was 45 years of age per report by NAR (the National Association of Realtors).

If the U.S housing market must sustain its action of continued growth, then the present generation facing the prime homeownership years have to be a part of it. So the question is, what is keeping millennials partaking in the plunge at a safe rate when compared to the earlier generations? The biggest factor here is economic. These can range from student loan debt to racial housing disparities. At least this is what recent research published by the Urban Institute found. The Federal Reserve found that from the year 2007 through 2015, student loan debt took the blame for 11% and 35% of the drop in homeownership for adults who fall within the ages 28 to 30. Millennials also have to wait longer than their predecessors to get married and have kids of their own. There is also the matter of racial disparities in housing. When you bring racial housing disparities, you will find another reason why the generation’s homeownership rate is a far cry from what it was a decade ago. According to a recent study by the Urban Institute, “if the racial composition from 2015 were the same as what it was in the year 1990, millennial homeownership rate would actually be at least 2.6% higher than it currently is.”

There is also psychological consideration. Because millennials were already of age as of when the great recession and housing crisis kicked off back 2008. For many millennials, this is not just about getting student loans. The entire economic system appears to be faltering for them. Some of them are not buying houses anymore. This is because they simply cannot afford to pay for them. While some are not buying because they are either not interested or they think it’s too risky to buy. But completely counting them out would be a huge mistake, according to an economist, Tim Jones. He believes that as millennials grow older, they will inevitably have the same percentage of U.S homeownership. Many millennials may prefer to sign their home purchase contract ahead of time.

A Way Forward

If the outlook proposed by Jones holds, the recovery from the 2008 recession should continue. However, while the U.S homeownership numbers continue to tick back upward and the prices are of real estate start pushing higher, homeowners in the current era still have concerns about the sector. Among the concerns that have been shown by homeowners is access to real estate for every person. This also includes groups that were not previously covered by the Fair Housing Act. Back in the year 2017, one federal judge said that the recently implemented Fair Housing Act also covers gender equality and sexual orientation. However, the FHA has not yet been amended to this day so it cannot be made official yet. Another notable remark was the words expressed by U.S lawmaker Congressman Gerry Connolly. According to Connolly, “any form of discrimination in the industry is unacceptable.” The lawmaker called on congress to push the Fair Housing Standards legislation into the 21st century. He urged fellow lawmakers to make sure that no one is discriminated against or treated in a particular way because of their gender identity or sexual orientation.”

Other homeowner concerns that are still making rounds include housing affordability and real estate market stability (although the government has implemented several programs to address these two concerns and provide help for the underserved segments of the overall population. One of such programs is the one put in place by the Federal Housing Authority. This mortgage program is designed to make sure home buyers gain access to mortgage insurance whenever they wish to. Even if it is during economic downturns. According to the former FHA commissioner Carol Galante:

“Offering a critical roadway to homeownership along with wealth creation for families in the United States must remain the core objective. This has to include putting more effort into making mortgage products available. It has to be mortgage products that give consumers low down payments or long-term fixed-rate loans. It also involves issuing average pricing on user mortgage premiums and offering consumers 100% insurance guarantee. This guarantee must be backed by the U.S. Government in full faith.

Additionally, all loans that are insured by the USDA (Rural Housing Service) give support to no less than 17 million Americans in rural areas. However, the recent budget cuts by the Trump-led administration have threatened housing programs like that of the USDA. Another way forward is the Veterans Affairs Home Loan Guarantee initiative has helped veterans secure no less than 20 million loans. Although, the program has achieved this landmark with a host of issues. The initiative needs enhancement. Reforms must be made to give veteran’s a little more flexibility to carry out negotiations in the current housing market. U.S. veterans have always been well-served through the years by the VA’s appraisal system. However, it unfortunate to admit that this system is now under a great deal of pressure.

Regarding the issue of market stability, the government’s decision to put up the conservatorship program has successfully pulled back the GSEs from collapsing. Although, that relationship was not necessarily intended to be a permanent one because the federal government had planned to replace it with a new improved housing finance initiative. But so far, all efforts to reform the current GSE system have stalled. According to Congressman Yvette Clarke, the federal government can improve the state of the sector by providing better mortgage insurance, and housing counseling. Programs that promote down-payment assistance, as well as implementing programs that can address other key services, will go a long way.

CHAPTER 7

HOW CAN YOU SAVE YOURSELF, AND YOUR FAMILY DURING A HOUSING DOWNTURN?

So you managed to buy the biggest property that you could afford. But it is possible that there was a time that you didn’t believe that you would be able to afford such a big house. Now, at some point in the future you are now able to get the house you always wanted or dreamed about. However, after a number of years, your initial low-interest housing rate has disappeared. Even the adjustable rate that looked like an excellent idea at the beginning keeps pushing your mortgage payments higher and higher. If that isn’t bad enough, instead of boosting your homes market value, it is going the opposite direction and looks set to take a dive. While your initial reaction might be unimaginable, there is probably no to need to worry very much. Instead, you must learn how to protect your family, yourself and your home, in the event that a global recession hits and the housing sector is affected.

As stated earlier, financial downturns are not necessarily limited to only the stock market. The housing industry isn’t exempted. When this occurs how can you protect yourself and your family? How can you save your mortgage during a housing crisis? Here are some suggestions:

Make a Down Payment of 20% on the Property

Try to make a down payment on any home you purchase. You can put as little as 10% or preferably 20% in down payment for any home you decide to acquire. Try to pass on the chance for a zero–down payment house financing. If you cannot afford to make a down payment, chances are you can’t afford the home in question.

Don’t Let a Mortgage Lender Dictate which Property You Can Afford

Here you must stick to own plans. Try to avoid relying on your real estate agent or mortgage lender when it comes to determining the housing cost that you can comfortably afford. Try to work out your budget. It is important to make sure that you can afford any mortgage payment plan you decide to use. You must be agreeable with any associated housing expenses that come with the plan you go for.

Go for a Fixed Mortgage

Note that while it is a fact that housing interest rates are going higher and higher, it might not be too late for you to refinance into a fixed-rate loan. If you own a primary mortgage or home equity loan that offers you variable interest rates, refinancing both options to become a fixed-rate first mortgage plan may be the best move. Having a fixed-rate mortgage will allow you to know what to expect in the future.

Home Equity Shouldn’t Be Your Sole Line of Credit

If you want to survive a housing collapse, you won’t depend on home equity as your sole line of credit for emergency funds. Make sure you keep your emergency money in your cash reserve accounts. Some examples of these include regular savings accounts. You also have money market mutual funds as well. However, in the event that you deplete the aforementioned accounts due to a prolonged emergency period, you can then access your home equity and make it your next line of credit.

Don’t Wait for Appreciation

While appreciation is a positive development, it is unwise to count on appreciation in housing whether long term or short term. Too many investors continue to figure appreciation alongside their profit strategies. Using terms like this is the number of funds I will make in profits over the next 5 years after the value of the property appreciates. Even though appreciation is a regular part of the housing sector, there is a chance of disappointment. Appreciation is an excellent thing to anticipate. However, when it fails to appreciate or instead of appreciating, the property value gets worse, those who include appreciation in their value strategy end up suffering. So it is better not to count on it. It’s a gamble.

Avoid Borrowing if Possible

If your property has significantly appreciated in the last few years, you might face the temptation of cashing out on your equity before losing the opportunity to make gains. This can be the case due to fears of a potential market downturn. But you don’t have to do it. Equity appreciation isn’t money in the bank. If you decide to cash out, your debt margin will only widen. And your monthly payments will also increase. If the equity is the money you need for something else, you can sell your home when it still has value and downsizes to a less luxurious area. If you fail to do this, you might fall into a trap and end up owing more on your equity than your home’s worth.

Pay Close Attention to Market Indicators

It is essential to constantly pay attention to the state of local market indicators. Make sure you are current on what is happening in the national economy. The majority of experts have even gotten it wrong when trying to predict the future of the housing market. However, they always pay attention to market indicators. This should be done to give you an opportunity to make your best guesses when you see any kind of changes in the overall economy or real estate market.

You Must Remain Calm during a Housing Crisis

A housing crisis always creates panic among the populace. However, you must remain calm no matter how dire the situation is. Note that if you can comfortably afford your housing payment, then a falling market is likely not going to hurt you. The real estate market values are mostly meaningless. The only exception can come when you are a seller or you are doing refinancing. However, when this is absent, your home’s market value will only be a number on a piece of paper.

Buy Conservatively

One of the best ways to protect yourself during a housing crisis is to buy conservatively when the market is ideal. You can consider having a lot of equity on the day you choose to buy your home. If you decide to hold the property for the long term, it will be important to know if you can cash in on it today or cut down rents in the future and still manage to maintain steady cash flow. Make sure you are always prepared for anything. In the event that there is a drop in the housing market to be prepared. This is better than betting on the housing market to appreciate. In the end, if you manage to get an appreciation, then that will be a bonus.

Move with the Market Changes

When you actively monitor market shifts, you will be able to move with the market. You will have a good idea of the latest developments and market trends. Because most of the U.S. is a seller’s market, meaning the number of home buyers is higher than those who are looking to sell. This situation will increase house prices. Which will make it the best time to sell. The market change at any time. It can either be for the better or for worse (a housing crisis). It is better to be ready than to be taken by surprise.

Widen the Gap between Your Homes’ Worth and Your Debt

It is paramount that you maintain a healthy distance between the total amount that your housing is worth and the total amount you owe after the deal. Make sure that the distance is never less than 20% at least. Try to focus your attention on widening this gap now so that you will be able to easily sail through in the event of a market downturn.

Don’t Buy a Home When You Know You won’t Spend Up to 5 Years in the Property

If you are not planning to stay in a property for longer than five years at least, it is best that you don’t buy one. Instead of buying a property outright, you can rent one. In the majority of cases, breaking even on home purchases can take at least five years. The reason for this is because of the costs involved in buying and selling homes. It is better to rent when you are staying in the property for a short period.

CONCLUSION

It is no surprise that there are many indications that point toward the occurrence of a global recession as stated above. Experts have supported these fears by predicting that the event will occur in the near future. Many financial commentators have predicted that the event will happen through an extended period. However, there are fears that a recession will be critical. The experts fear that the coming recession will overtake the previous recession in terms of severity. It will have a more negative impact on the real estate sector than the great recession of 2008. It is understood that financial commentators have set a timeline for the recession. This is likely going to occur either before or the United States general elections in 2020.

Again, while everyone has kept their focus on the dismal PMI prints of the German’s, the investing public has failed to take note that the United States economy has been slowing down in a similar way. This can be seen when investors were reminded that the United States’ economy is sitting on the edge and is on the brink of collapse. As stated in the intro, this finding was made when Markit published its report about the United States’ manufacturing PMI. Markit’s report stressed that the PMI of the United States has unexpectedly tumbled and is now in contraction territory.

This is evidence to support the idea that a global recession is imminent. The US PMI dropped by a whopping 50.4% from the position it held last month (August 2019). It is now missing the expectations of attaining a 50.5% rebound. The United States PMI is currently under the 50.0% expansion level. Which is actually the first time this is occurring in the last decade. The last time such a situation played out was in September of 2009. This was during the last recession and housing crisis. That recession seriously hit the real estate sector at that time. The majority of families lost their homes. At that time the eyes of economists and financial commentators haven’t been clear regarding the coming of a recession. Now it is different. History only needs to repeat itself. As we can see there are strong signs pointing towards a similar situation in the near future.

There is a lot of evidence to back these claims. One of these shreds of evidence is the report that mortgage defaults have risen in recent months. In fact, for the first time since the 2009 global financial crisis mortgage defaults are now on the wrong side of the market. According to the report, an estimated 243,000 borrowers have defaulted on their first-lien mortgages in quarter 2 of this year. While the quarter which is about end certainly played a huge factor in the increase in mortgage defaults, there was a noticeable overall slowdown in default activity decline. National default rates rose by at least 3% compared to what was observed in Q2 of last year.

In anticipation of a housing crisis, should another recession hit the United States and the world at large, it is normal for homeowners to seek out the best solutions. Everyone will want to find a way to stay safe during a housing crisis. You must be able to protect your mortgage. You must also protect yourself and family when there is an economic downturn. Earlier in this piece, several suggestions have been given to people who are looking for protection from a housing crisis should one occur. Following tips like moving along with the market shifts will help. When you actively monitor market shifts, you will be able to move with the market. Don’t purchase a home when you know you won’t spend 5 years in the property. It is best that you don’t buy a property outright. Why not rent one instead? It is better to rent when you will only be staying in the property for a short period of time.

Another suggestion discussed in this book is the issue of balancing the gap between the value of your property and your debt level. It is paramount that you maintain a healthy distance between the total amount that your housing is worth and the total amount you owe after the deal. Make sure that the distance is never less than 20% at least. One of the best ways to protect yourself during a housing crisis is to buy conservatively when the market is ideal. Make sure you are always prepared for anything. In the event that there is a drop in the housing market, you must be prepared. This is better than betting on the housing market to appreciate.

You must also keep a close eye at market indicators. It is essential to constantly pay attention to the state of local market indicators. Make sure you are current on what is happening in the national economy. This way you can be prepared for any scenario. You must also avoid borrowing and banking on appreciation. It is unwise to count on appreciation in housing whether long term or short term. Even though appreciation is a regular part of the housing sector, there is always a chance of disappointment. Appreciation is an excellent thing to anticipate. However, when it fails to appreciate or instead of appreciating, the property value gets worse, those who include appreciation in their value strategy end up suffering.

Finally, you must try to make a down payment on any home you decide to purchase. You can put as little as 10% or preferably 20% in down payment for any home you decide to acquire. Try to pass on the chance for a zero–down payment house financing. If you cannot afford to make a down payment, chances are you can’t afford the home in question. Surviving a housing crash may appear overwhelming, but with simple planning and applying the suggestions listed in this content will go a long way in helping you achieve your goals.