Will This Market Eventually Crash?
The real estate market keeps going on and on as we see home prices rise and inventory diminished. It is a tough market for buyers out there and if you're like many buyers, you've probably made several offers, gone above and beyond the asking price, and pretty much given away your firstborn in order to get the house. But are we in a housing bubble? Is this going to crash at some point? Are we balanced enough to keep going? These are all questions fervent on the minds of real estate professionals and those buying and selling… So pretty much anyone in the real estate world right now.
Because of remote work and record low mortgage rates, many of us are relocating and purchasing homes at an all-time high and we're trying to get out of the city as well. We're looking for great backyards, more space inside and out, and spaces to have home office options or school at home. But, there are just not nearly as many homes as there are buyers. This severe housing shortage is fueling record high prices and cutthroat competition.
This naturally begs the question of a housing bubble. Is there any reason to worry? Well, let's take a look at what it really means to have a housing bubble and what leads to one.
What is a housing bubble?
A housing bubble happens when home prices rise at such a rapid rate that there's just not enough inventory to meet the demand. Housing bubbles generally begin when there's a shortage of inventory and increased demand hence having a seller's market over a buyer's market. As these prices start to rise, many speculations on what could happen in the future take effect. Consumers expect prices to increase further so everyone wants to get a home as quickly as possible. But of course, what goes up, must come down so at some point, the steep housing price increase could be unsustainable. And that's where the housing bubble bursts. This could occur if housing prices fall drastically.
What leads to a housing bubble?
This unique real estate phenomenon can happen in just about any industry whether it stocks and bonds, gold, or houses. They don't often occur in a housing market because of the large financial responsibility associated with the home. But with the right combination of factors, a housing bubble can occur.
Several factors could in fact lead to a housing bubble such as a rise in economic activity. When the economy is doing well, people have more disposable income to spend on housing. If low mortgage interest rates remain low as they have for some time; loose mortgage lending practices, and while that's not like it was during the subprime mortgage boost, the looser mortgage lenders get, the more this could be on the horizon. There could be new mortgage products, longer times to build a house adding to the demand and urgency, a sudden change in migration such as folks moving from California or the West and East Coast areas to more suburban and urban areas. All of these factors can lead to a housing bubble if things are balanced.
What happens if a housing bubble bursts?
This can cause major problems in the economy. Many folks realize they've borrowed more than the home is worth and then struggle to keep up with house payments. If they lose their job or find themselves in financial hardship, they may not be able to make their payments and therefore the lender forecloses on the property. If too many of these issues happen, it will lead to a housing bubble burst.
So, are we in a housing bubble?
While one of the clues may lead to it, experts don't feel there is enough leading to a burst. The circumstances influencing the housing market today are different from those that happened in 2006 and 2007. This was typically a result of irresponsible lending. If you paid $500 in rent, of course you can afford a $2500 mortgage payment now, why not? It's that type of predatory lending that got people in trouble. Lenders are a lot more strict and the federal government is locking down on requirements for predatory lending. Plus, just about every buyer needs to be well qualified with 20% down payment and a lot of liquid funds even qualify or be accepted for an offer right now, which keeps that pressure of a burst low.
But what if you want to buy a house right now?
Like I said, buyers need to be well qualified. If you're wondering what it takes to buy a home, it depends on the neighborhood, the location, the demand, and your qualifications. Contact our office below to speak to one of our agents that understand the situation and how to qualify our buyers to get their offer accepted.