Housing Bubbles Past and Present

A bubble in housing is a condition that occurs economically when housing prices soar due to investor speculation and a false sense of belief on the part of the public that values will only continue to rise. The biggest housing bubble popped in the United Sates in 2008 with the subprime mortgage crises.

People who had bought homes they could not afford with literally no money down were suddenly straddled with a super-high mortgage payment they could not handle. They had no idea that the “ARM” on the paperwork they signed when closing on the home meant “adjustable rate mortgage.” This further meant that the mortgage payment would increase at a certain date to a certain level based on the index rate.

In 2008, suddenly half of America was falling into foreclosures mostly because of these untenable ARMs. Because very few people had any money put into the home, there was no equity available to make it worth selling. This led to the biggest recession since the Great Depression.

This collapse affected builders, construction, retailers in the home supply market, real estate companies, mortgage companies and banks. Even after the government “rescued” the big banks with special loans, the problems in the economy are still felt today.

Home prices have been on the upswing, but this is mostly due to foreign investors, many from China who have the money to invest in homes that most Americans themselves cannot afford. The fact that many Americans in huge housing markets like Phoenix, can barely afford to pay for their living expenses with salaries that cannot keep up with the higher home prices makes for an unsettling foreshadowing of what may come.

In fact, many people who live in big real estate markets in the US like New York or California, could not afford to buy the homes that they live in now on the salaries they make. Essentially, this creates a problem with the supply of homes available on the market.

Those houses that do get put up for sale can go for astonishing prices. This is because the inventory is so low. When these homes do sell, they boost the market value in a rather illusionary manner.

A home in one neighborhood of homes valued at approximately $400,000 sells for $650,000. This is because there is no other inventory available. All of the sudden, the homes surrounding it come with that same price tag. It seems to “prove” home prices will always go up.

This entices home flippers to jump on the market. The number of flips has increased again. Many of these flippers utilize hard money lenders to acquire these properties.  It is not as many as it was just before the Great Recession, but it is on a slight upswing. If it continues, there could be another pop in this bubble when the Fed raises interest rates for home loans in the middle of 2016. Hopefully, many people still have the lessons of 2008 fresh in their minds and the market will level off just enough for buyers to enter the market safely.

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