America’s Next ‘Housing Bubble’ Is Here — 5 Ways To Avoid Disaster
Written by
G. Brian Davis
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Rebekah Evans
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Between home prices soaring in the pandemic and interest rates surging in 2022, home affordability has reached near-record lows. The Federal Reserve reports that the ratio of the Case-Shiller Home Price Index to Consumer Price Index (CPI) inflation reached an all-time record in 2022 and has hovered near it ever since.
That leaves many analysts wondering whether an affordability bubble has formed — where home prices are increasing, while home values are not. As a homebuyer, how can you protect yourself from buying into a bubble? Find out below.
Also should you buy or build a home? Rachel Cruze has the answer.
Negotiate Aggressively
Home prices have already started declining in many markets such as San Diego, San Francisco and Austin. Jessica Vance, San Diego real estate agent, urged buyers to lean into that softening. “Don’t be afraid to ask for a large price reduction, for repairs, for closing costs,” she said.
As you price out properties with comparable sales (comps), Vance recommended only looking at sales within the last month or so. Older comps quickly become outdated in a weakening real estate market.
Force Equity With Fixer-Uppers
By buying a fixer-upper at a discount, you can create immediate equity by updating the property.
“One of my recent clients bought a house with old flooring and roof repair needs,” said Jacob Naig, real estate agent and investor of WeBuyHousesinDesMoines.com. “That sweat equity helps insulate them from price swings.”
Plan for the Long Term
Only buy a home right now if you plan to stay for at least five years. Otherwise, a temporary drop in home prices could leave you upside-down and unable to sell.
You can ride out market fluctuations by staying in your home long-term however, continuing to pay down your principal balance.
Run the Numbers on Plan B
What would happen if a curveball hits and you do have to move out sooner than expected?
Instead of selling, you could rent out the property — if the numbers make sense. But most people don’t understand just how many expenses landlords incur, beyond the mortgage payment. Use a rental cashflow calculator to forecast irregular expenses like vacancy rate, repairs and property management fees.
Most homes don’t actually cashflow as rentals, but if you find one that does, it offers extra protection against a bursting bubble.
Stress Test Your Finances
Too many homebuyers stretch themselves thin trying to buy the most house they can possibly afford. That leaves them vulnerable to life’s inevitable curveballs.
“For the average middle-class homeowner, home equity represents around 70% of their net worth,” explained Oren Sofrin, real estate expert with Eagle Cash Buyers. Protect your future home equity with a thick emergency fund to protect against job loss and unexpected expenses. The last place you want to find yourself is in foreclosure if a bubble-induced recession like the Great Financial Crisis strikes again.
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