The global financial crisis of 2007-08 was a monumental disaster triggered by the subprime mortgage crisis and collapse of the U.S. housing bubble. It was the worst housing crash in history and nearly caused a second Great Depression.
But what caused the bubble in the first place?
1. Surging prices
From mid-90s through the peak in July 2006 steadily surged. Residential real estate seemed to be a great and very safe investment. In some markets, the housing market climbed almost 40% in a single year.
2. Low interest rates
Following the burst of the tech bubble in the early 2000s and the September 11 terrorist attacks, the Federal Reserve drastically reduced interest rates and then maintained low. This “easy money” policy made people borrow money and buy houses they could not afford. Eventually subprime borrowers were plagued with too much debt and couldn’t pay their mortgages.
When home prices finally reached unsustainable levels, the bubble burst.
So, what is the situation in 2021? Let’s look at some stats:
1. Higher housing prices
In June 2021, home prices across the U.S. surged 24.8% year-over-year, according to Redfin. Homes sold for their highest prices and more quickly than ever.
2. Higher interest rates
Interest rates are slightly. The average rate for a 30-year fixed-rate mortgages increased to 3.06% from 2.99%. Mortgage applications fell 2% for the week. The higher the interest rate, the less house people can buy and fewer existing homeowners want to buy a new home.
3. Lower inventory
Inventory remains low, which has been a problem for years. Prospective homebuyers and investors are experiencing the most competitive market we’ve seen in the last few years.
History does repeat itself, so be on guard. We are probably not in a bubble that bursts yet, but we have a situation where we should start to be cautious. Start preparing for bad times, and having a solid financial education is your best chance to weather the storms.
You can’t control how the economy develops or when a bubble will pop. But you can control your financial education to minimize its impact. It all begins with understanding that it is not the money that makes you rich but your financial knowledge.
If you need assistance or are interested in being tutored or coached, contact me.
Sven Franssen