With home prices rising in many parts of the country, many people are concerned that we're heading toward another housing crash similar to the one of 2008. However, today's market is significantly different from the market right before the "housing bubble" of 2008 burst.
Here are four reasons why we're not heading toward another housing crash:
1) Banks Have Tightened Their Lending Practices
Risky lending practices were the biggest factor leading to the 2008 crash. Financial institutions were giving mortgages to people with low incomes, bad credit, and those who were unlikely to pay their mortgages once the interest rates increased. This made home ownership possible for people who would normally have needed to rent due to lack of income, poor credit, etc. However, as a result, millions of people began defaulting on their loans thus pushing our country into an economic crisis.
Today, those predatory and unethical lending practices have been completely overhauled. Mortgage standards are much more strict and lenders are more cautious with whom they grant loans and the terms of those loans. This had led to greater stability in the market and will prevent another crash like the one we experienced in 2008.
2) Fixed Rate Mortgages are the Norm
Subprime mortgages played a huge part in the housing crisis. The riskiest borrowers were offered adjustable rate mortgages. Once the introductory period ended, borrowers saw their interest rates skyrocket and their mortgage payments quickly doubled or tripled in size. This made the loans completely unaffordable and resulted in massive defaults on loans throughout the country.
Today, adjustable rate mortgages are still available but are much less common. Fixed rate mortgages are the norm. When people borrow, they know exactly how much their mortgage will be for the life of the loan. This allows them to assess their budget and only borrow as much as they can afford, making it much less likely that they will default.
3) Today's Rising Prices are a Supply and Demand Issue, Not the Start of a Bubble
In 2008. prices rose rapidly because everyone wanted to buy property,,,including those who normally wouldn't have been able to. Purchasing a home in the US grew at a frenzied pace thus driving up prices.
Today's prices are rising because people are staying in their homes longer, decreasing the amount of inventory available in competitive markets. When inventory is low, there are more people competing for the limited houses on the market therefore driving prices up. This kind of price increase is a normal part of a competitive market.
4) There's Economic Growth to Support Rising Prices
Possibly the biggest factor to show the US isn't heading toward another housing crisis is the economic growth supporting rising prices.
Most competitive markets are growing rapidly and showing historic price increases is due to economic growth. People are flocking to regions with job openings, stable economic growth, and opportunities for the future. Potential home buyers want to purchase property in a place they know will offer plenty of career and economic opportunities.
With economic growth to support rising prices, there will follow a much more stable market.
Don't worry that rising housing prices indicate another housing crash is looming. Instead, rest assured that today's housing market conditions differ significantly from the conditions in 2008. Add to it that today's lending practices are much stricter and the economy is booming so we won't see another housing bubble anytime soon.