What is a real estate bubble?

A housing bubble, also sometimes referred to as a “housing bubble,” occurs when the price of housing rises at a rapid rate, driven by increased demand, limited supply, and emotional buying. Once speculators recognize that house prices are rising, they also enter the market, further increasing demand. The phenomenon is called a bubble because inevitably, at some point, it will burst.

Definition of the real estate bubble

A housing bubble is a market situation in which prices rise beyond what most believe to be reasonable or sustainable. A bubble can form when the demand for housing exceeds the available supply – it usually requires a rapid and unsustainable increase in house prices over a short period of time. This can create an environment where buyers feel they have to pay too much to enter the market, while sellers feel they can charge the best price to exit. Eventually, the bubble bursts and home values ​​plummet.

But there is a critical difference between a real housing bubble and a simply very active housing market. A bubble is a short term condition, while a hot market is longer term. Hot markets happen all the time – the US has had one for several years – but bubbles are rare. When a housing bubble bursts, it can have a lasting effect on the economy.

What causes a housing bubble and what are the signs?

A housing bubble is often a symptom of artificially inflated prices. Many factors can lead to this state, including a rapid increase in demand and a lack of supply to meet that demand. Other possible factors include low mortgage rates, loose credit standards and widespread investor speculation.

This can often be a vicious cycle: low rates lead to increased purchases, which leads to less supply, and so on. Add REITs and real estate professionals to the equation, and the typical buyer can find themselves completely out of the market.

What happens when the bubble bursts?

If a real estate bubble looks like a balloon, all it takes is one prick to deflate it. Real estate bubbles can burst for many reasons, including rising interest rates, falling property values, a recession, or even a natural disaster.

When a bubble bursts, it can have disastrous consequences for owners, investors and the economy in general. When property values ​​plummet, banks and other lending institutions may run out of mortgages for homes that are no longer worth the price paid or the amount lent.

Additionally, if values ​​drop significantly, homeowners also face a struggle. If buyers pay too much during the inflated prices of a bubble, and then prices fall, they run the risk of going “under water”. A mortgage is considered underwater when the value of the home has fallen below the loan amount – in other words, the homeowner now owes more on the mortgage than the home is worth. Homeowners who are underwater are also considered to be in a negative equity position – this is one of the most common consequences of a housing bubble. Some homeowners may even be forced to foreclose on their homes, which can further depress the value of surrounding properties.

The financial crisis of 2007-08

The bursting of a real estate bubble often has a brutal effect on the economy, with the real estate market being a major economic driver. It could be followed by a recession or, in severe cases, even a crash. The financial crisis of 2007-2008 is linked to the bursting of a housing bubble that began in the 2000s. House prices peaked in early 2006 and started to decline in 2006 and 2007. On December 30, 2008, the Case-Shiller home price index reported its biggest price drop in its history. Many homeowners were unable to repay their loans, leading to defaults and millions of foreclosures. The economic crisis that resulted from this burst bubble is commonly referred to as the Great Recession.

Are we in a housing bubble in 2022?

Housing bubbles are often associated with low mortgage rates and a large number of first-time buyers. Sound familiar? It’s no wonder many people are wondering if we’re experiencing a housing bubble in 2022.

However, most pundits and economists agree that the market is not headed for the bursting of a bubble, as it did in the early 2000s. Although the housing market certainly remains hot , there are several reasons why experts do not predict an imminent crash. These include continued high demand, low inventory levels (although housing inventories are slowly increasing), and much tighter lending standards than prevailed at the time.

What to do in a real estate bubble?

If you’re a homeowner during a housing bubble, you might see your home’s value skyrocket, at least on paper. If you’re tempted to cash in and sell your home when you can get the best price for it, make sure you have somewhere else to live before jumping into the fray. A seller’s market is great for sellers, but if selling means you then have to buy a new house to live in, you’ll also experience the other side of things.

If you’re one of the many people hoping to buy a home, a bubble might not be the best time to shop around. If you have the luxury of staying put and waiting, this might be a good option. Otherwise, be sure to do your research before bidding on a home that may be overpriced. An experienced local real estate agent can help you determine what’s best for you – and maybe even find you a hidden gem in a crazy market.