Rapidly Rising Home Prices – What Do They Mean and What You Should Do?
In 2005, the real estate industry saw record highs for home prices. However, this era quickly came to an abrupt end with the housing market crash of 2007-2008.
Rapidly rising home prices caused by demand and speculation is known as a housing bubble. These are usually followed by a sudden plunge in pricing which is when the bubble bursts.
Many experts speculate that we are currently experiencing another housing bubble, so let’s discuss some causes and effects for this kind of housing market. Then we’ll explore ways in which you can prepare to approach real estate related transactions such as home equity loans or home refinancing during this kind of period.
The Causes and Results of a Housing Bubble
When housing prices rapidly rise, they can create a housing bubble due to several factors outside the norm occurring simultaneously. In these scenarios, the economy is typically strong, and individuals are more willing to take on debt through refinancing measures, such as home equity lines of credit (HELOCs).
Interests rates and lending standards during these periods are generally lower, which can lead to risky behavior and higher levels of speculation in real estate.
The bubble bursts when these factors end up leading to more houses on the market than the demand that exists for them, eventually toppling over the real estate industry.
Home prices and values then fall drastically, often leaving owners underwater on their mortgages or in debt beyond what they can repay. Foreclosures then typically flood the market, driving home prices down even further.
The result? All of that extravagant spending can quickly lead to many people losing their homes, losing their savings, and maybe even considering bankruptcy. However, there are some ways to avoid the repercussions of a housing bubble.
3 Smart Investment Moves During a Housing Bubble or Crash
Protect your investments, savings and property during a housing bubble by limiting your use of refinance and home equity loans.
As mentioned, avoid excessive and irresponsible use of home equity to buy recreational vehicles, rental properties or luxury items. This type of spending can cause countless homeowners to fall into personal financial crises upon the sudden recession of home prices and demand for housing.
The most recent housing crash taught experts that some of the home equity expenditures that they previously deemed ‘not so bad’ (such as paying for home renovations or buying secondary cars), might not be so wise after all.
Here are some tips for making smart financial decisions in a suspected housing bubble.
- Only Make Necessary Home Improvements: If you’re considering refinancing a home to receive equity in cash, only do so if you need to pay for essential home improvements such as new roofing, faulty wiring or foundational problems. It might be worth it to refinance in order to save your home’s integrity with essential repairs.
- Carefully Consider Refinancing for College Tuition: Rising tuition costs have tempted many homeowners to utilize refinancing methods to avoid high interest student loans. The smart move is to consider cash-out refinancing on a first mortgage before a HELOC, since it could offer you even lower interest rates. Comparing rates is essential before making any moves.
- Cut High-Interest Payments with Home Equity: One of the best investments you can make is to pay off high-interest credit card debt using a home equity line of credit at a lower interest rate. Housing bubble or not, this can help you get out of debt faster, and you’ll be making your monthly payments to your home equity lender instead of the credit card company.
Speak to a financial advisor or a refinancing expert if you are looking for more information about how to wisely navigate through a housing bubble.