With memories of the recession fresh in the minds of many Americans, a television ad for an easy mortgage can quickly spread anxiety. The 2006 housing bubble, after all, was preceded by similar warning signs. Predatory lenders allowed homebuyers to overextend themselves on houses that they couldn't afford, inflating home prices. This bubble would eventually burst and U.S. banks would spiral into a crisis as more and more lenders foreclosed on borrowers who couldn't make payments. While regulations were put in place to prevent fraud and encourage responsible lending, some economists are expressing concern that home prices might again be rising beyond their actual worth.
Though U.S median home sale prices reached an all-time high in June, the bar for first-time homebuyers is lower than it was a few decades ago. While mortgages once required a significant initial investment, down payments now are often as little as 2-3% of the price of the home. Lenders have also begun using alternative credit scoring systems, allowing people with little or no credit to qualify for loans. As the economy grows stronger, the government and banks alike are loosening their conditions for borrowers.Â
According to UCLA economist Stephen Oliner, around 80 percent of loans made in the U.S. are government-backed and exempt from many of the regulations put in place following the housing crisis.
But allowing more people to buy homes is not a bad thing, so long as borrowers aren't stretched too thin by their monthly payments. Given the recession and recent technological advancements, younger generations are not building credit the way their parents did. Many are using debit cards or mobile payment apps to spend only what they have, so a low credit score under the old model may not necessarily indicate a risky borrower. Alternative credit scores may offer unconventional buyers a chance at home ownership.
Most experts agree that we're not headed toward a crisis anytime soon. Lawrence Yun, chief economist of the National Association of Realtors, argues that rising home prices are simply a matter of supply and demand -- fewer new homes are being built -- so the price of existing homes are rising. RealtyTrac reports that the nation as a whole is not in a bubble, but properties in some popular coastal regions are overvalued. Once sky-high home prices in San Francisco are falling as the tech boom slows down. In Miami, where a flood of cash from overseas created a boom of luxury condominiums, developers are beginning to sweat as foreign investors leave and properties stand vacant.
Prospective homebuyers needn't panic over all this speculation but should keep in mind the lessons of the last housing crisis. Evaluate your income and expenses and make an honest assessment of what you can afford. Oliner also recommends financing your home with a 15 or a 20-year mortgage to build up equity quickly -- though this would mean paying a higher monthly amount than you would with a 30-year term. Predicting nationwide housing bubbles is a complex and imperfect process, but if you pay attention to trends in your region and come up with a responsible budget, you can find the right home for you and let the market do what it will.