For the last year, the phrase “housing bubble” has been used by everyone from news anchors to influencers. But what does it really mean?
On the surface, a housing bubble can be defined as a period of time when there is more demand for housing than there is supply. This causes the cost and value of homes to rise.
That is the “bubble” part of the equation. But what happens when the bubble bursts? Is the U.S. in a new housing bubble? Will the 2007-2008 housing crash repeat itself?
Most experts don’t think so – and here’s why.
How does a housing bubble happen?
To understand why most experts do not think a crash is about to happen, it is important to do a deeper dive into the housing bubble phenomenon.
A “bubble” happens when investors put a lot of money into something because they believe its price will rise over time. But, speculation is just that: a very good guess.
In recent years, investors bought up affordable housing at an unprecedented rate which made more investors want in on the action. This increased the demand for investment properties, and actually drove the prices so high that ordinary individuals and families wanting to just buy a home were priced out of the market.
But, at some point, this upward momentum reaches a place where it is unsustainable. This is when the “pop” or “crash” happens.
Now, it’s common to see investors doing just the opposite. They typically start selling their properties to make some cash before the predicted crash.
The decrease in prices makes many buyers stay away, and the whole bubble begins to work in reverse. This often leaves investors holding a property that has lost its value and they may end up paying on a mortgage that is more than the property is now worth.
Housing prices tend to begin a rapid decline, and this is when the “bubble” bursts.
What happens when the housing bubble bursts?
When a true housing bubble occurs, many homeowners, investors included, may find themselves upside down in their mortgages. This means that now they owe more on the home than it is currently worth.
In such an event, it can feel nearly impossible to sell the home without taking a loss.
Those who weathered the housing bubble crash between the years 2007-2010 did so because they purchased a home they could afford, avoided risky loans, and hunkered down. Eventually, the equity in their home returned.
However, investors who wanted a quick turn around for their property investment took a large financial hit. They could not sell the home for what was paid for it, and they could not refinance to make the mortgage payments easier to pay. Many investors went bankrupt.
What can the government do to protect against housing bubbles?
One of the main changes since 2007 has been almost completely doing away with sub-prime lending practices. This ensures that only qualified buyers are issued mortgages.
Additionally, new regulations were implemented that stopped easy access to funds for property purchases by investors.
One way the government has slowed down and all but arrested the current housing bubble was to raise the interest rates, making mortgages more expensive to have. Other measures include regulating the buyer’s market, and taxing the money investors make on properties they own, but do not live in.
Is a real estate bubble happening now?
Many housing and real estate experts disagree about whether the U.S. is in a housing bubble. What they do agree on is that the housing crisis will not likely end in a crash as it did in 2007.
That is because there is an ebb and flow to real estate pricing. While it has been significant, it is still not what most experts call a severe bubble. In other words, prices can drop without a crash happening.
The other reason is that the supply and demand has leveled out more than it was in 2007 (when construction and building outstripped demand). Also, unemployment rates are low, and consumers are still buying goods at a steady rate.
Many experts are now warning that while a bubble followed by a crash is not imminent, a recession may be on the horizon.
This is based on their predictions that consumer spending is going to slow and even go into the negative numbers. If there are at least six months of this type of consumer behavior, then a recession occurs.
This could mean more layoffs, and most likely more foreclosures.
The Economic Impact of Housing Bubbles
In 2007-2008 a massive housing bubble burst left many investors and consumers reeling.
It happened for many reasons, chief among them was the practice of issuing sub-prime mortgages to buyers who otherwise would not have qualified for a mortgage.
When several large financial institutions failed, these sub-prime lenders also failed, and the global lending system was impacted.
If you do not own a home, or are wondering if you should purchase a home, your concern is valid. The impact of housing bubbles on the economy can be severe.
Housing bubbles create a type of financial instability with a ripple effect that goes through just about every facet in the economy. However, the U.S. government learned something from the 2007 housing bubble disaster and subsequent crash, and even though another housing bubble has occurred, steps have been taken to mitigate the severity of a crash.
So, what does this mean for the average consumer? It means that 2023 might not be the best time to purchase a home if you do not plan to stay in it for five years or more.
Additionally, most experts do not expect the interest rates to come back down until sometime in 2024. If you do need to purchase a home as a primary residence, then you can do a quick Zillow or Redfin search on homes for sale in the area you are targeting.
If there are many houses becoming available in the area where you are looking, then it might give you more bargaining power.
Many investors are now placing their properties on the sales block because they can no longer afford to keep them. This spells a great savings for the savvy buyer.