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Welcome, Future Early Retirees.

It’s no secret that the rise in home prices has been alarming over the past 5 years. It feels like just as you are closing in on being able to buy a house, the price goes up, and you are just out of reach. This can’t go on forever, right? Surely we will get a crash like we did in 2008. First, we need to understand what exactly happened in 2008 to cause the crash in the first place. Do the same circumstances apply today?

In today’s newsletter:

• 2008 Financial Crisis

• What can we learn?

• Things I found interesting

• Hands off investing with Acorns

• Financial Tools

Trivia

2008 Financial Crisis

The Lead Up

Going back into the 80s, banks viewed houses as a stable asset that could generate healthy and predictable returns. This led them to take on as many mortgages as possible, which incentivized the construction of many new homes. This made homes more readily available for the average American, which was generally seen as a positive development. However, as time went on and banks became more reliant on these mortgages to produced returns, they had to find ways to keep producing mortgages.

This started to lead the banks to be less selective about who they gave out loans to. On top of that, loan officers earned significantly larger commissions by selling variable interest rate loans (more on these later), incentivizing them to push these riskier products. These incentives created an environment in which individuals who were typically unqualified to purchase a home could do so, enabling banks to maintain their return on investment (ROI) objectives. Now all of this wouldn’t be so bad as long as the people who took on these loans didn’t default all at once.

The Crash

All of these factors created the perfect storm for a crisis. Default rates started climbing in 2007 due to the rising interest rates, declining house prices and lending standards becoming a joke. Historically the delinquency rate (90 days or more past due or in foreclosure) had been 1.7% (1979 to 2006). At the peak of the financial crisis, it was as high as 12%. Not good. All those mortgages the banks owned were worthless now and several banks either filed for bankruptcy or needed a government bailout to avoid it.

This led to a large increase in the number of houses being put up for sale. Prices collapsed as a result. Many people now owed more on their home than what it was worth, trapping them in their current situation.

Understanding Housing Economics

The price of a home boils down to two factors: Supply and Demand.

Supply: The number of houses available

Demand: The interest in those houses

While both factors are important, supply has been more of a focus with homes because there's generally strong demand for homeownership. Some key indicators such as months of supply, price-to-income ratios, and housing starts help assess market conditions and guide informed decisions about buying or investing in real estate.

What can we learn?

A lot has changed since the financial crisis in 2008, as it was 16 years ago now, but there are some important lessons we can learn and apply today. Here are my biggest lessons learned from the historical event:

• Variable interest rates are the devil: When you are going to buy a house, you will be given the option to choose between a fixed or a variable interest rate. A fixed rate stays the same throughout the life of the loan, and a variable rate changes as the federal interest rate changes, meaning your monthly payment fluctuates as a result. If you ever get asked about getting a variable interest rate, I would immediately say no and politely ask for the fixed rate.

• Ensure you can actually afford your home: Loan officers will tell you the maximum amount you can qualify for. That doesn’t mean you should look for a home in that price range. It is best to aim for the monthly mortgage payment to be about 25% of your income. This is not a rule but is a good goal to shoot for. You can get an idea of what your monthly payment would be by using the loan payment schedule on the Money Bags 💰 website.

Are we in a similar situation today?

Not really, here’s why:

• Current delinquency rates are around 1.8%, much lower than during the crisis.

• There's increased oversight on loan qualifications, which limits the number of bad loans distributed.

• Some regional housing markets are experiencing overbuilding, but it's not a nationwide issue.

I expect home prices overall to continue to rise for the foreseeable future as the current shortage of houses has no end in sight. However, I do believe we will see a crash of some sort in the next 10-15 years. I’ll explain it more in-depth in next week’s post 😉. If you want to ensure you don’t miss it, you can subscribe here so it gets delivered straight to your inbox.

When Should You Buy a Home?

You should buy a home when:

1. You can afford it (ideally, your monthly payment is 25-30% of your income).

2. You plan to live in the house for at least 5 years after purchasing it.

3. You've carefully considered your personal financial situation and long-term goals.

Things I Found Interesting

• TikTok’s fight to stay in the US starts

• Chipotle wants a bot to prep your avo

• Microsoft adds faster Copilot to Excel and Word

• Nobody Lives In These 10 Empty Big Cities

• 10 High-Paying Jobs That You Can Learn Online In 2024

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