Are We in a Housing Bubble? 4 Signs to Watch for
Nobody would blame you if you looked at today’s housing market and became worried at what you saw, after all there are a lot of similarities between now and the housing bubble collapse of 2008. As we recover from an unprecedented pandemic, many experts are left wondering if the housing market is in another bubble or if the unique circumstances have created an equally unique situation.
What is a Housing Bubble?
Fundamentally, a housing bubble occurs when the market prices of residential real estate rise quickly due to high demand but low supply. Because of these high prices, more people invest in the market hoping to profit from rising prices, causing the bubble to grow from continually rising demand and home prices.
Eventually, homes become overvalued, the prices get too high and are unsustainable. Demand goes down, supply goes up, and housing prices fall back down.
4 Signs of a Housing Bubble
1. Risky Loans are Common
Whether it is desperate banks or desperate people, subprime loans have been and continue to be a sign of a growing housing bubble. Though there are higher standards in place now than there were in 2008, the US government still backs loans that may be considered risky.
2. Home Prices Rise Faster Than Salaries Do
If the prices of homes continue to go up but your salary does not, you’re left with a choice to hold off on buying a home or to buy one that stretches your budget to its breaking point. This means a potential rise in foreclosures and a decrease in demand for homes.
3. Interest Rates Rise
The ongoing rise of interest rates can be a sign of a housing bubble. As these rates rise, people suddenly cannot afford a home at the same price that they could before which causes home prices to sink.
4. Rise in Foreclosures
It’s never a good sign when people can’t afford to pay their mortgages and end up foreclosing on their homes, especially when it happens on a larger scale due to larger economic trends.
2008 Vs. Today: Are We in a Housing Bubble?
Due to the extraordinary circumstances of the pandemic, many experts believe that we find ourselves somewhere near that ‘popping point,’ as we did in 2008 before the recession.
You would not be wrong if you thought that the current events affecting the housing market look suspiciously like a bubble waiting to pop. Rising interest rates, high demand, rising prices. All of these are signs of a bubble and some experts believe the market may be standing at the tipping point as home prices rise, especially in the lower end of the bracket usually filled by first-time homebuyers.
But, not everyone is as worried. Though the signs are there, some experts aren’t expecting the market to crash due to the key differences between today’s housing market and 2008’s, partly due to the fact that most of the economic downturn was caused by a voluntary shutdown rather than a collapse of the lending and credit system.
We are also seeing a quick recovery in many sectors which lost the most jobs over the course of last year as people get vaccinated, restrictions get lifted, and many are becoming more comfortable returning to their normal lives.
To learn more about the housing market and real estate, schedule an appointment with a residential real estate attorney at Lee Scott Perres, P.C.
