Lessons Learned? Will the Foreclosure Crisis Repeat Itself?

by on Foreclosure Crisis

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The real estate market crash was definitely not a highlight of American history and the effects are still very much present today. From low interest rates and low home prices to a high number of families facing foreclosure, we have still not reached “normal” although we are making significant strides toward real estate market recovery.

However, all of these efforts, the bank settlement agreement, foreclosure laws, etc. are all completely pointless unless lessons are learned from the situation that keeps Americans from putting themselves back into the exact same situation again in the future.

Have we finally learned our lesson?

What Led to the Real Estate Market Crash?

To even begin to answer that question, it is first essential for us to examine exactly what led to the real estate market crash.

First, there was a mixture of irresponsible lending and irresponsible buying from homeowners who got caught up in unrealistic visions of ever-increasing home prices from 2000-2006. Second, there was an assumption that home prices would always go up and therefore many people purchased more home than they could afford, assuming that if prices continued to rise (as they expected) then there would never be a problem selling the home (more than likely for a profit).

Although one might initially think that the irresponsible buying was primarily conducted by those who were uneducated, a study indicates that the highly-educated Generation X individuals were the biggest population of consumers that were acting irresponsibly.

Specifically, those who faced foreclosure were more likely unable to make a significant down payment on the home (which resulted in a higher loan-to-value ratio) and had a lower income. However, with their education they were projected to have a strong future financially and therefore over-reached (taking on more than they could currently afford).

Obviously other issues included lenders loosening their lending standards and loaning to these individuals as well as ever-increasing home prices that was ridiculously high at the peak in 2006. However, at the end of the day it was primarily the result of consumers purchasing more home than they could realistically afford.

Have We Learned our Lesson?

More than likely the answer to that question is a resounding “no.” We, as consumers, have more than likely not learned our lesson since there has not been a drastic shift in the American mindset. Furthermore, lenders have more than likely not learned their lesson since there have not been significant changes to lending laws that would help prevent the issue from repeating itself in the future; instead, there was only the foreclosure settlement agreement that was more of a slap on the wrist than anything else.

Another potential problem area is, ironically, something that is helping to jumpstart home buying and home construction: low interest rates.

Historically-low interest rates make buying a home more affordable, which normally is terrific. But, as was the case in the 1990's with low rates, making borrowing cheaper and easier isn't necessarily always good – especially when it provides an additional incentive to purchase more home than you can really afford. Plus, rock-bottom prices encourage a mindset that says, “Hey, prices can’t get any lower – they can only go up!”

For those who somehow missed 2007, prices can and will go down. There is a terrific amount of money to be made in the market in the years to come for investors, and plenty of homes to be had for cheap for aspiring homeowners. But – and this is a big one – consumers have to learn how to only buy homes they can afford and live within their means.

That, plus serious legal reforms, could prevent another foreclosure crisis 10 years down the road.

Below is a video on saving your home from foreclosure: