No matter how you measure it, 2007 was certainly an interesting year for real estate across the United States. We saw the typical highs and lows of real estate fluctuations, and then we saw the news media has labeled a "mortgage crisis."
In truth, the full effects of all this are yet to be seen. But we can certainly cast our attention backward and see things in the perfect clarity of hindsight. In the spirit of hindsight, here are five real estate lessons from 2007.
1. Subprime Mortgages Are a Bad Idea
Okay, so I'm generalizing here. Not all subprime mortgages lead to heartache. But looking at the numbers from 2007, it's pretty clear that subprime mortgage lending in general is a bad idea.
While the average consumer learned this lesson over the last year or so, economists had actually been issue warnings against the subprime industry since the 1990's (when that industry was booming). In fact, they predicted exactly what we are seeing right now -- home foreclosures in record numbers.
And that brings me to the next lesson we learned about real estate in 2007...
2. You Shouldn't Rely on the Government for Help
We just talked about the warnings from economists in the 1990's, about the future perils of subprime lending gone wild. So why didn't our government do something to curtail the "easy lending" practices of these lenders? The same reason as usual -- money. In fact, if you follow the money trails (which are public record by the way), you can see how certain subprime lenders donated a lot of money to certain governmental campaigns.
3. Use an ARM Loan With Caution
The adjustable rate mortgage (ARM) went hand-in-hand with the subprime lending practices that were so common in the 90's through the early 2000's. People credit problems were offered mortgage loans with low interest rates up front, but with the uncertainty of a future adjustment on that interest rate.
Some borrowers understood the concept of the ARM loan, and would either refinance or sell the home before their mortgage reset to a higher interest rate. But even more borrowers failed to understand this concept, and were shocked to see their mortgage rates shoot up after three years or so.
Here's where consumers and lenders share part of the blame. It's up to lenders to educate consumers on the future risks of an ARM loan (instead of closing as many loans as possible and letting borrower's sink or swim). It's also up to consumers to educate themselves about these things, so they can choose the best type of mortgage loan for their financial situation.
4. If You Can't Afford a Home, You Can't Afford a Home
It would be great if everyone in this country could afford a home. But that is simply not the case. People with financial problems, poor credit, and uncertain income should probably avoid the extra financial burden of buying a home. Instead, they should focus on shoring up their credit, getting control of their finances, saving money, etc.
If you strengthen your financial house first, your actual house will set on a more stable platform -- a platform of financial security.
5. Good Credit is More Important Than Ever
Going forward, into 2008 and beyond, home buyers will be placed under greater scrutiny by mortgage lenders. This is a direct result of the mortgage "crisis" that came to a head in 2007. Tougher regulations have been imposed on many lending institutions (especially the subprime bunch), so the "easy lending" days of the past are gone. At least for a while.
So it's more important than ever for home buyers / mortgage shoppers to have good credit scores. It's also wise to pay down unnecessary debt, such as credit card balances, to achieve a more favorable debt-to-income ratio. Lenders will be looking at these things much more closely in the future, so you've got to have your financial ducks in a row.
