![]() ![]() In other words, loans are “cheap.” This affects the housing market as people seek mortgage lenders to borrow money at a lower cost than normal. People borrow more money when interest rates are low because it costs less. This means there is a clear human psychological element of excitement that feeds into producing real estate bubbles. When people have an optimistic outlook on their economic future, the societal effects are contagious: positivity begets positivity. Speculation exacerbates the speed at which the real estate bubble expands. The faster it flows, the more often it touches people excitedly looking to profit, such as speculative buyers. More spending means more cash flowing through the stock market and society at large. When people feel they’re on solid ground, they spend money. 1.) Economic stabilityĪlthough a housing bubble may not sound like a stable phenomenon, having disposable income certainly is. There is no single cause for a housing bubble to occur, but there are a few common factors that encourage it. Unfortunatley, when a housing bubble bursts, people can lose their homes and life savings. If this happens in our soap illustration, you’re just stuck in the bathtub out of breath, with soap all over your hand. ![]() There are too many homes at prices people are unwilling to pay, causing their own homes to lose value. When this happens at once, the bubble, unable to support itself, finally bursts. However, since these high home prices are no longer affordable to most people, demand suddenly decreases. Housing supply starts to catch up with demand. If too many people do this at the same time, the above-average price for homes rises faster than people can pay. Speculators, thrilled to make a profit, notice the upward trend and jump in on the action, driving home price appreciation to a breaking point. They then tell their friends, who spread the optimism and expectation of making money in real estate.Īs the news catches on, momentum drives people to further invest, as everyone believes their actions will pay dividends down the line. They are likely to see their (future) home as an investment, so they purchase a new house or make home improvements, thinking it will give them a nice financial return in the future. People become excited that their (future) property will increase in value because that means more money in their pockets. If more people seek housing than the housing market-the bubble-can provide, home prices-the air in the bubble-rise. If you blow too much air, the bubble can no longer support all the air inside, so eventually, it explodes. The more air you blow, the bigger it gets. You pour soap onto your palm, then blow on it, causing a small bubble to grow. That's a stark comparison to the previous housing bubble in 2008 when overbuilding was the issue.Imagine that you’re in the bathtub. has underbuilt its housing needs by at least 5.5 million units over the past 20 years. According to the National Association of Realtors, the U.S. By July of this year, that number had dropped to 2.87%. At the start of the pandemic in March 2020, the 30-year fixed-rate mortgage rate sat at 3.45%. While speculation certainly is a factor, the main cause for the current housing demand is low mortgage rates. "A bubble tends to be something that's inflated that could burst at any minute and change and that's not really the case here." "We say bubble because we can't believe how much prices have gone up," CNBC real estate correspondent Diana Olick said. ![]() However, according to most experts, the market is shaping up to look more like a boom rather than a bubble. "You can see in just basically the last 15 months or so, we've seen a dramatic acceleration in home price growth to levels we haven't seen in decades," CoreLogic chief economist Frank Nothaft said. ![]()
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