How Survivors of the Great Recession are Faring
Ten years ago, the earth stood still, and for a brief moment, we collectively held our breaths. Bear Stearns. Lehman. AIG. Countrywide. Fannie Mae and Freddie Mac. More than 10 million families lost their homes to foreclosure during the housing crisis; a chilling echo of plight of the Americans who lost homes and farms during the Great Depression as vividly portrayed in “The Grapes of Wrath.”
It’s time to step back and see how far we’ve come – and what lessons can be learned.
History shows us that financial bubbles come around more than once. Four-hundred years ago, investors experienced one of the first financial bubbles, spawned by the lowly Dutch tulip bulb. Investors saw prices soar to unprecedented levels; the poor became rich, and the rich became filthy rich. Story has it that someone traded a castle and carriage for a single bulb. The marketplace went wild with speculation, and people made fortunes in days rather than weeks. But the bubble burst. Each time we say to ourselves, “It’s going to different,” and each time we see tragically similar results. Economics 101 – there will be bubbles. Be cautious when others appear to be fearless and don’t always follow the herd.
The Power of the Fed
In the wake of a global financial meltdown a decade ago, the Federal Reserve embarked on an unprecedented move to stabilize a fragile economy by purchasing $4.2 trillion of mortgage-backed securities. Since September 2017, the Fed has gradually been unwinding this unprecedented purchase, which resulted in lower interest rates for homeowners, businesses and consumers. Historically low interest rates cut both ways, however. It can be a boom for borrowers, but also a bane to savers seeking returns on their savings. For many, this has put money back in their pockets through refinancing at lower rates.
The Housing Market: Down, but Not Out?
From its peak in 2006, the average home value dropped by one-third. Many learned the painful lesson that investing in a home does not provide a guaranteed path to wealth. According to Fannie Mae, in the years since, many Americans have once again begun to experience growth in home values, and some indicators show there may even be a pickup in momentum. The Federal Reserve Bank of San Francisco suggests that slower household formation in the years since 2008 has led to a somewhat muted recovery. However, in recent years, household formation has increased, driving first-time home buyers back into the market just as inventories have shrunk. The rental market continues to be tight; rents have increased and vacancy rates have plummeted. With millennials still considering homeownership important, homes sales have shown an uptick as this generation transitions from renting to owning as optimism increases.
A Cautious Market
The American economy leans heavily on housing. However, it has been tough for many to attain the American dream of home ownership. The credit score necessary to secure a mortgage has increased significantly since the go-go years of the early 2000s, as has the amount of paperwork required. In addition, many younger Americans have had to choose a diploma over a mortgage. The average amount of debt a new graduate carries with them across the stage as they receive their degree has steadily increased. While the American dream lives on, it may mean waiting longer or working harder than ever to achieve it.
Homeowners and those considering embarking on the American dream should consider a few things:
- Clean up your credit
Check your credit score before considering any loan. A score of 680 may get you a decent rate, but you’ll need a 740 or higher for the very best rates. You can request a free credit report at annualcreditreport.com.
- Don’t overreach
It can be easy to overextend when buying your first home or when upsizing. Mortgage payments, real estate taxes, and home insurance should be less than 28 percent of income. Add on any additional debt payments and the total should be less than 35 percent.
- Prepare for the rainy day
There are many reasons to have an emergency fund, but I’ll give you just 200,000 of them. That’s the number of major appliances shipped to stores each and every day in the United States. Any of us could find ourselves with a lukewarm refrigerator or a cold oven. Having a rainy day fund can provide a measure of security, no matter what happens on the journey.