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How to Protect Yourself from Real Estate Bubbles and Crashes

Bubbles aren’t limited to just the stock market. The housing bubble started in 2001 as speculators fled the stock market and set their sights on real estate, sending home values up. When housing prices started to deflate, some homeowners found they owed more on their mortgage than their house was worth. As low introductory interest rates reset to higher rates, many homeowners found themselves unable to pay their mortgages. Foreclosures skyrocketed. When the bubble burst, it left a credit crisis unseen since the Great Depression.

You’ll know the full effects of the 2007–2008 real estate burst when you read about it in the history books. To protect you from a real estate crash, do the following:

  • Don’t rely on your mortgage lender or real estate agent to tell you how much house you can afford. Work out your budget and make sure you can afford the mortgage payment along with associated housing expenses.

  • Put at least a 10-percent (preferably 20-percent) down payment on the home. Pass on zero–down payment financing. If you can’t afford a down payment, you likely can’t afford the home.

  • If you don’t plan on being in a house for at least five years, don’t buy one. Rent instead. In most cases, breaking even on a home purchase takes at least five years due to the costs involved in buying and selling a home.

  • Avoid using home equity lines of credit for consumer purchases. Use home equity lines of credit exclusively for emergency purposes.

  • Don’t rely on a home equity line of credit as your sole source of emergency funds. Keep your emergency funds in cash reserve accounts, like savings accounts or money market mutual funds. If, however, you deplete these accounts in a prolonged emergency, you can then turn to your home equity line of credit.

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