5 Steps To Protect Yourself from a Real Estate Crash
Housing prices and availability are determined by an endless number of factors. If a crash were to occur as some people believe it will, there are a few steps you should take to protect yourself.
Step 1 – Only control what you can control
There will always be factors outside of your control, especially with something like a nation-wide housing market. It’s important to understand what you can control, and what you can’t. For example, you can’t control interest rates or whether or not your bank will approve a HELOC (Home Equity Line Of Credit). You CAN control how much you spend on your home, when you sell, and how much debt you can service.
Step 2 – Only buy a home you want to live in
If you’re buying as an investment it’s possible a market downturn will force you underwater when it comes time to sell. If, on the other hand, you’re buying a home to live in, a downturn may not affect you as long as you can wait until the inevitable upturn before selling.
If you’re assuming you ‘can’t lose’ because real estate ‘always goes up’, you are not ready for real estate investing.
Step 3 – Budget for the future
Many people bought property a few years ago when mortgage interest rates were at an all-time low. If you could only afford a place because of those low interest rates, you should really start thinking about when your mortgage will come up for renewal. It looks like in the next couple years interest rates won’t go up very much, but at any time it’s possible that inflation will drive rates up to a pre-crash range of 5-7%.
Could you still afford to service your mortgage with a 7% interest rate? As this rate is something you can’t control, you should plan ahead for when/if this happens. Could you sell ahead of time to avoid defaulting? Or could you earn more money to cover the difference?
Step 4 – Build an emergency fund & pay down debt aggressively
With borrowing costs at the almost-free level, it’s very easy to forget standard financial planning advice. After all, who needs an emergency fund when you can just borrow more money? Remember that your financial future and a comfortable retirement do not hinge on low-cost loans. You need to pay off your debts to make servicing your home loan easier.
Even better, why not set a crazy goal of paying off as much of your mortgage as you can before interest rates go up again? Every extra dollar you put towards your principle now shaves a ton of interest off over the life of your mortgage.
Step 5 – Get your emotions under control
It’s so easy to get caught up in the dream of owning your dream home that everyone has to be careful about making a huge financial mistake just because you found ‘the perfect home’. Yes, you should like the house you buy. No, you shouldn’t spend an extra $100,000 because the swing-set in the backyard reminds you of the one you had when you were a kid.
Be strict and make sure your partner is on the same page.
Have a budget and FOLLOW IT.
Get advice from friends and parents if you need it – often people close to you will know how you look at things and may be able to protect you from the world’s most expensive swing.
You buy a house, not a home
Don’t get stuck with buyer’s remorse with the largest purchase you’ll ever make. A house is just walls and a roof – you make it a home piece by piece, and you don’t have to bankrupt yourself to speed that up.