We’ve all been warned: “Those who cannot remember the past are condemned to repeat it.”
But as the 2008 housing market crash fades into the rearview, it’s easy to forget that at one point, not all that long ago:
- 1 in every 54 households in the U.S. had received a foreclosure notice.
- 8 million Americans were at least one month behind on their mortgage payments.
- Homeowners lost a cumulative $3.3 trillion in home equity in a single year.
More recently we recall the third-largest housing boom in U.S. history, when homeowners across the country saw their properties make massive value gains starting in 2012. It’s easy to be bold and take risks when times are good!
But the moment you feel tempted to throw caution to the wind, splurge on home decor rather than necessary maintenance, or even buy a little more house than you should—remember these six valuable lessons in homeownership and personal finance that the 2008 housing market crash forced us to learn the hard way.
1. Don’t take on more house (or debt) than you can comfortably afford.
In the years leading up to the housing crash, just 14% of mortgage applicants were denied. As of 2017, that figure had risen to 32% for prospective borrowers with imperfect credit.
Financial reform legislation such as Dodd-Frank tightened the lending spigot that led ultimately led to the subprime mortgage cascade, but as we get further removed from the crisis, lenders have started to relax their standards once again. That puts more of the onus on buyers to set a reasonable budget for their means.
As a general rule, financial experts recommend spending no more than 30% of your monthly income on housing costs. For homeowners, that includes extra expenses like taxes, homeowner’s insurance, and private mortgage insurance if you put less than 20% down.
Personal finance expert Dave Ramsey also warns homeowners against 30-year mortgages, encouraging buyers to opt for a 15-year, fixed rate mortgage instead if possible. Despite the higher monthly payments, a shorter mortgage period means that borrowers will save money in the long run, pay less interest over time, and build equity faster.
That said, 30-year mortgages remain the most common type of home loan. If you do get one, beware of the pitfalls of getting a variable interest rate and consider that a larger down payment could bring down your rate by showing the lender that you’re lower-risk.
2. Always keep an emergency fund for any surprise home repairs or maintenance.
While we’re talking budget…you haven’t accounted for all of your housing costs until you’ve factored in routine and unexpected maintenance.
“Keep a little bit of extra cash on hand, because a lot of buyers get caught. They don’t think about the unplanned expenses. You might end up needing a new roof, a new HVAC, or some new appliances down the road.”
This is another reason not to take on more home than you can reasonably afford. It’s going to be up to you to cover the cost of repairing every leak and every creak, so act wisely when you’re budgeting for your monthly homeownership expenses. In fact, you should plan to set aside 1% to 3% of your home’s total cost each year for any necessary repairs that might crop up, such as:
- Roof repairs
Cost: Anywhere from a few hundred dollars to $3,000 (depending on project scope)
- Hot water heater replacement
Cost: Between $1,000 and $3,000
- New windows:
Cost: Between $450 and $600 (including installation)
- Furnace or HVAC:
Cost: The average furnace repair costs about $270 and an HVAC repair averaged about $320; outright replacing either can cost homeowners $4,000 to $6,000.
When we refer to emergency savings, we’re not talking about a wad of hundreds stuffed in your sock drawer. Save smart by putting your cash stash in an interest-yielding account that’s earmarked for emergencies only.
3. Adjustable-rate mortgages are typically not your friend.
Leading up to the housing market crash, adjustable rate mortgages were peddled as an attractive “nontraditional option” and lured buyers in with “teaser rates,” which increase after a predetermined amount of time (anywhere from 6 months to 10 years, depending on the mortgage agreement).
In 2006, after a period of historically low interest rates during which millions purchased homes with ARMs, the Federal Reserve hiked interest rates to slow the booming economy: a 17-step increase from 1% to 5.25%. With little notice, homeowners with resetting ARMs found themselves on the hook for significantly higher payments than they had anticipated.
“The homeowner’s plan was to refinance before the adjustable rate kicked in; however, when they had taken the adjustable rate loan, real estate values were inflated,” explained real estate lawyer Kara Stachel. “When they tried to refinance due to the adjustable rates, real estate prices had taken a serious nosedive.”
Though ARMs got a bad rap in the aftermath of the crisis, they’ve started to make a comeback.
But the risk remains the same: you could be vulnerable to dramatic interest rate increases down the line. If you don’t have the savings cushion to gamble on the decisions of the Fed and fluctuations of the economy, then stick with the stable and predictable fixed-rate mortgage.
4. Don’t assume every price run-up is a bubble, but you’d be smart to strike while the market is strong.
“Typically, home prices are going up on average, if you look over the last 20 or 30 years, probably about 4% a year,” said Hamilton. “You can kind of draw a straight line that shows 4% appreciation over time. If you see appreciation that’s going rapidly above that, you can watch that and start to see where you might be in a bubble.”
Keep in mind, though, not every price run-up indicates housing bubble territory—to the contrary, when healthy market forces like a strong economy and low unemployment bolster homeownership, real estate values will rise but not artificially.
Nevertheless, if the housing market crash of 2008 taught us one thing, it’s to take advantage of a seller’s market. Even if a downturn in the market isn’t drastic, the old stock market logic applies: buy low, sell high.
5. Do your homework on today’s ‘nonprime’ mortgages.
Even in today’s highly regulated mortgage market, when you set out to sell your home, you could go under contract with a buyer who has less-than-perfect credit. In the market’s recovery, “nonprime loans”— or loans made to borrowers that represent a higher risk of default—have emerged as a secondary market.
In the first quarter of 2019, buyer financing issues caused over 6% of contract settlement cancellations and delays, according to HomeLight’s Top Agent Insights report. So as you get to the closing stages of your home sale, consider asking your real estate agent to do a little digging into your would-be buyer’s situation if you’re not feeling confident about the stability of their financing or credit.
A nonprime loan (which likely comes with higher interest rates for borrowers and requires a bigger down payment) isn’t necessarily a concern, but it might warrant a bit of investigation to make sure the offer is legitimate.
You can ask your agent to get a copy of the buyer’s loan package. Bring it to a mortgage lender you trust, and ask them to look it over. If everything is on the up-and-up, you can feel good about moving forward with the sale.
Don’t let the past come back to haunt you—remember these lessons from the housing market crash of 2008.
If 2008 taught us one thing about prudent homeownership, it’s to always keep your eyes open and make wise choices when handling your personal finances. If something seems too good to be true (especially where money is concerned)—it probably is.
Header Image Source: (Roberto Júnior/ Unsplash)