With homeowners, investors, and realtors noticing a major shift in the housing market, with a rise in interest rates and a major increase in rent prices nationwide, fears of a housing bubble or ‘market crash’ stays top of mind. First let's dive into what a housing bubble even means for the housing market, and what experts say we can expect as we enter the last half of the year. A housing or real estate bubble is a short-term occurrence. It lasts for numerous years. In general, it is led by something beyond the norms, such as speculation, demand, excess liquidity, and immoderate ranges of investment, all of which have the capability to generate unsustainable asset prices.
Housing bubbles can have serious economic consequences. They lead to instability not only in the real estate market, but it can also lead to a massive financial meltdown or crisis as loans go bad and consumers are unable to repay them. As banks attempt to reclaim their money: thousands, if not hundreds of thousands, of individuals may be evicted from their homes.
What is a Housing Bubble?
A housing bubble, often known as a real estate bubble, occurs when the market price of residential real estate skyrockets caused by demand, speculation, and overspending to the point of implosion. This will emerge when the real estate market surpasses the actual supply. The initial increase allows for the possibility of future increases. This expectation draws speculators, who invest in the market with the hope of gaining from increasing costs. This increases demand and prices, causing the bubble to expand and stretch. At some point, demand dips or stagnates while supply increases, leading prices to plummet and the bubble bursts.
What Really Caused the Housing Bubble?
Housing bubbles are caused by a mix of circumstances that result in strong demand and rapid price growth. For starters, a thriving economy is required. When people's disposable income increases and they feel safe in their professions, the desire to hit the streets and home shop develops.
Lack of Affordable Housing
Housing shortage is one of the big problems in many cities around the world. Many individuals have been homeless for the past years due to expensive housing and unemployment. We all know that housing is one of the most important human needs but many individuals are still homeless due to incapability to afford rents or to buy a home because of a tight market for affordable homes and excess inventory of luxury properties.
Interest rates and mortgage rates are rising Increasing interest rates are a strong indication that the real estate market is deteriorating. Property is in more demand when loan rates are low. When an individual buys a home, they want to lock in a low mortgage rate.
People are less likely to buy when mortgage interest rates begin to increase. When demand for properties falls, sellers will have a more difficult time finding a buyer, which may result in reduced housing prices.
Downturn in the Economy
The overall economy is one of the signs to consider if there is a Housing Bubble. The economy has an impact on the supply and demand for housing. If the economy is doing well, unemployment will be at its lowest. It can cause individuals to have a sustainable income where they can afford to buy and sell homes. Then if the economy is down, individuals have less income to spend on property while the realtors can find it difficult to sell houses due to the decrease of the demand causing them to lower the price.
Rising housing prices start to fall
Land and home values have continuously risen for the past decades. Home values tend to increase over a period of time especially when it is in demand. But if you start to see home values depreciate or decrease it can be a sign of a housing bubble.
More Home on the Market
More homes on the market means more competitors. To be able to sell your property faster you need to cut the price. When home prices are cut, it can have a domino effect throughout the market which can cause housing bubbles.
Where are we now with the housing market?
Now that we have a better understanding of what exactly a housing bubble is, let us take a look at what the housing market looks like right now. We recently released an article that discusses what a raise in interest rates means for sellers. However, in a press conference that was held last month by the Federal Reserve System, gave us an answer regarding the current outlook of the housing market.
Here is a transcript based on the last FOMC Press Conference June 15, 2022:
CHAIR POWELL : “Rates have moved up—we’re well aware that mortgage rates have moved up a lot—and you’re seeing a changing housing market. We’re watching it to see what will happen. How much will it really affect residential investment? Not really sure. How much will it affect housing prices? Not really sure. It’s—I mean, obviously, we’re watching that quite carefully. You would think over time—I mean, so there’s a tremendous amount of supply in the housing market of unfinished homes, and as those come on line—whereas the supply of finished homes, inventory of finished homes that are for sale, is incredibly low, historically low. So it’s still a very tight market. So prices may keep going up for a while even in a world where rates are up. So it’s a complicated situation. We watch it very carefully. I would say if you’re a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again and mortgage rates are low again. So this will be a process whereby we—ideally, we do our work in a way that the housing market settles in a new place and housing availability and credit availability are at appropriate levels.
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