About Housing Bubble

There are millions of houses sold and bought every year across the country. The buyers and sellers go with the market prices of the properties using fair appraisals. 

However, many factors determine the prices of these properties and in the last few years, we see them skyrocketing. 

This is something that many people are scared of, as this was precisely what happened in the Great Housing Bubble in real estate back in 2008. In this post, we will understand what is a housing bubble and are we looking at one very soon.

What Is A Housing Bubble?

A housing bubble occurs when the rise in house prices is driven by demand and not the country’s economy. 

The real estate prices rise, however, there is no logical explanation for the rise in real estate prices, such as job creation, interest rates, or demographic changes.

 A similar situation in real estate occurred in the country before the great recession of 2008. 

The constructions, sales, and prices were booming at a very fast pace in the real estate sector, and eventually, the housing market bubble ended bursting. 

This happened because the housing market was booming for all the wrong reasons.

While all this was happening, the lenders were too lenient in providing the mortgage, and many borrowers were unable to make their mortgage payments once the recession hit and many borrowers lost their job. 

This simplified the situation a bit. But when the economy collapsed, everything else collapsed with it like a house of cards.

What Are The Reasons That Cause A Housing Bubble?

Usually, real estate markets are not susceptible to bubbles compared to other financial markets due to the hefty transaction and maintenance costs associated with home ownership. 

However, the high demand for real estate can be stimulated and attract more buyers due to historically low-interest rates and lenient underwriting guidelines. 

Rising interest rates and tightening credit standards can reduce demand, causing the housing bubble to burst. 

The bubble is prone to burst when the interest rate rises drastically and the lenders post strict underwriting guidelines.

When Will The Housing Bubble Burst?

In light of the ongoing war and rising interest rates, the demand for real estate is decreasing and real estate pricing is dropping in some cities. However, many cities are still holding up with the real estate market. 

To curb inflation the Federal Reserve has been increasing the FED rate which is increasing the cost of borrowing for any individual looking to apply for a mortgage to buy a new property.

Though many experts think that the housing bubble is inevitable, it is uncertain when the bubble will burst. 

Some experts think that this is going to happen sooner than expected as many companies are laying off their employees and this could increase the number of mortgage payment defaults, which could lead to mass foreclosure. 

While some say that there is still scope for a market correction and that the housing bubble is not bursting anytime soon.

Another factor affecting the real estate bubble is inflation. If you look at the inflation rate currently, it is significantly higher compared to the last housing market crash in 2008.

Conclusion

The real estate housing bubble burst is scary at multiple levels. It affects the entire country’s economy and also other financial markets. 

According to the current situation where the higher inflation and higher mortgage interest rates, the demand for real estate will drop. 

However, the US real estate market still has some firepower left to sustain through the current situation and hopefully, it does not have a major effect on the economy.