What is a Housing Bubble and Are We in One?


A housing bubble. What actually is it? No doubt, you will have heard about them, but there is a fair amount of ignorance when it comes to what a housing bubble is and – perhaps more importantly – whether we’re in one or not. One thing is for sure – if you’re about to sell your home or are trawling the housing market looking for a new one, then the presence or absence of a housing bubble is certainly something to be concerned about. Moreover, it could alter your plans significantly.

What is It?

The term “housing bubble” is all to do with the price rise of homes in a particular area. Steady price growth is considered a good thing for property market stability, and it’s also good news for those in theposition of selling a home.

However, when prices rise to quicky, the growth rate becomes unsustainable. This can happen on account of many different factors, such as an employment boom or favorable interest rates (neither of which the U.S. is experiencing right now). As this growth increases, homeowners can earn equity and sellers are in an advantageous position to shift the property for a good price. This is the bubble. Nevertheless, bubbles can burst.

What Happens When the Bubble Bursts?

The danger of a housing bubble is precisely that homes can soon become overvalued, which leads to a fall in prices – often quite suddenly. When this happens, the dynamics of the housing market are altered. Homeowners, with no intention of selling, are not as adversely affected as anyone engaging in the property market when the bubble bursts but, generally speaking, it is not a good thing.

Nonetheless, price growth can actually be sustainable, and it’s not that a bubble bursting is simply an inevitability. It is the behavior of speculators, home sellers, and home buyers that can cause a housing market crash. For example, if property speculators are flooding the market and buying up homes with the express intention of selling them on when the price inevitably increases, this can lead to an overvaluing of homes precisely because they are not being purchased to live in.

And it isn’t just residential properties for sale that are affected. The vacation home company REMAX Hot Spring Village say that the phenomenon is well known in rented properties and second homes for sale. A housing bubble is a phenomenon that affects every aspect of the housing market.

Ultimately, homeowners who purchased a home during a housing bubble are likely to have paid considerably more for it than it was worth (especially if they purchased just before the bubble burst). This situation is quite common, simply becauseuntil the bubble burstsa home owner can expect to make a profit on any future sales.

How to Act in a Housing Bubble

The trick for surviving a housing bubblethenis always to behave with caution. But you can only know how to behave with caution if you can identify a housing bubble when it comes along. It would be fair to say that the U.S. is currently experiencing a housing bubble – rising prices have a propensity to reflect that – with speculators tending to wait out these periods in order to purchase again when prices drop.

Nevertheless, it doesn’t seem likely that they’ll get a chance any time soon. We may be in a housing bubble, butfor it to burst, there would have to a boom in inventory and a drop in demand. Neither of these seem likely.

Therefore, we can perhaps say things are stable for now, but such energetic times always call for caution.