Due to the consistently high prices in the real estate market around the country, people have been wondering whether we're in a bubble for the past couple of years and, if so, when it will burst. That remains to be seen, and some analysts don’t feel like we should expect it to happen soon, at least not the way it did in 2007.
If there were a decline in the market, what might trigger it, based on historical trends?
What exactly would a burst mean in the housing market bubble?
What Does a Housing Bubble Mean?
First, what’s a bubble?
A housing bubble happens when the demand outpaces supply in the market, so the average price of properties rises. The rise happens abnormally fast.
The period of growth in a real estate bubble is generally viewed as unusual.
Bubbles can happen when investors or speculative buyers are bidding up the marketplace in many cases but other factors play a role too.
However, the bubble can pop when supply becomes realigned with demand.
We are likely in a bubble right now by definition, but when, how, or even if it will burst are unknowns.
No two real estate bubbles are the same regarding their economic impact, the length of time they last, or the effects on individual homeowners.
How Do Bubbles Form?
A housing bubble isn’t a new concept. These form and then pop or burst at different intervals, but the one that’s most most people currently remember is the one in the mid-2000s.
The crash was fueled by massive growth in what was known as subprime mortgage lending. Too many borrowers applied for and ended up getting mortgages that were too expensive for them to be able to afford. That then spurred unusual growth in demand for houses and speculation in real estate.
Subprime borrowers couldn’t keep up with their payments, particularly when the Federal Reserve raised interest rates. When the buyers couldn’t make their payments, millions went into foreclosure, leading to a dip in home prices, increases in financial problems, and the pop of the bubble.
The real estate bubble created a recession in the U.S. economy and had lasting effects years after.
What Happens When the Bubble “Pops”?
When a housing bubble pops, different things can happen. One common outcome is that buyers have homes with mortgages well above the current valuations. Sellers tend to have properties that sit on the market for long periods, sell for less than expected, or don’t sell.
If someone overpaid for their home and then can’t sell it or can’t sell it for even what they paid, it can become a larger economic problem at scale.
What Causes the Burst?
Some of the events that potentially cause a housing bubble to burst can include:
- Increases in interest rates can make buying a home unaffordable for some or could make the home someone is in unaffordable. When the home becomes unaffordable, it can lead to default and foreclosure. These effects then mean more supply on the market.
- General economic downturns mean less disposable income, fewer available jobs, and job loss, all of which have the potential to decrease housing demand.
- The demand goes down, creating an equilibrium in supply and demand, slowing the pace of appreciation in home prices.
When there are growing losses, lending requirements and credit standards become tighter. Borrowing for a mortgage is more difficult, demand decreases, and the supply increases. Speculators also leave the market, resulting in a fall in prices.
The debate currently again is the if and when of a potential bursting bubble right now. Analysts don’t know because while it looks like it could happen, at the same time, there’s a historic housing shortage. It’s not false confidence creating rising prices in the home market. Instead, it’s the actual home shortage.
Older Americans live longer and remain in their homes, while younger people are trying to buy homes.
The pandemic also affected the supply of available homes, making people less willing to move during a time of uncertainty and slowing or halting some construction.
The prices could stay high until supply somehow catches up, and as it stands currently, predatory lending and problems with the financial structure aren’t the issues. Instead, the issue is a fundamental shift in how people behave, including young people, families, and retirees.
