What is the Real Estate Bubble? Everything You Need to Know

Lots of folks are always curious about the housing market, especially those looking to buy or sell homes, investors, and experts. But here’s the deal – the housing market isn’t always easy to figure out, and one big reason for that is something called housing bubbles. 

What’s a housing bubble?

A housing bubble happens when home prices shoot up really fast because lots of people suddenly want to buy houses. It’s like a sudden craze for buying homes, but it’s not because of real reasons, just speculation. According to Logan Mohtashami, an expert, housing bubbles occur when prices get way too high compared to what’s normal, and the demand for houses is driven by people trying to make a quick profit.

The tricky thing about housing bubbles is that they can “pop.” This means whatever was making everyone want houses suddenly stops, and then no one wants to buy anymore. When that happens, house prices start falling super quickly.

For example, in the mid-2000s, there was a housing bubble because it was too easy to get a loan to buy a house. Everyone wanted houses, but when it became harder to get loans, not as many people could buy, and prices dropped.

Housing bubbles are not like other bubbles you hear about, like the crazes for Beanie Babies. Buying a house is a big, serious decision, and it’s not something people change their minds about easily. Plus, taking care of a house costs a lot of time and money, so it’s not something people do just for fun or speculation. That’s why housing bubbles are not as common as other types of bubbles.

What makes a housing bubble? 

Well, there isn’t just one reason – it changes each time. But the common theme is that it happens when the housing market gets a bit crazy and moves away from its usual rules. Usually, it’s because something outside the normal housing scene pushes up the demand for houses.

For example, in the 2000s, the housing bubble burst because of something called subprime mortgages. These were risky loans given to people who couldn’t normally buy a house. It opened up home ownership to more people, but when these folks couldn’t pay back the loans, they lost their homes when the rules got stricter.

Nowadays, we don’t have those risky loans, so the situation is better for homeowners. But there’s still a risk when people start buying homes not to live in them but to make quick money. This is called speculation. When prices go up, speculators see a chance to make a profit, so they buy lots of houses. This makes the supply of houses less, and prices go even higher, moving away from the normal rules. When the bubble bursts and too many houses are around, prices fall a lot, and homes lose value.

How to tell if we’re in a bubble?

Figuring out if we’re in a housing bubble is like solving a tricky puzzle. Even experts can’t always agree on it. They argue whether a sudden jump in house prices is because of normal changes or if it’s something totally disconnected from the usual rules.

An economist named Luis Torres explains that just because home prices are shooting up fast doesn’t mean we’re in a bubble. It’s only a red flag if these price hikes don’t match the usual trends for that area. Also, since what’s considered normal changes over time, it’s tough to say when the market is acting weird because there’s no fixed “normal” to compare it to.

But here’s a trick: check if rent prices are going up too. If they are, it might just mean more people are moving to an area, or there’s a higher demand for houses. Skylar Olsen says, “If home values grow much faster than rents, that’s a sign something might be off.”

Another clue is if house prices are rising way faster than people’s incomes. Usually, when income goes up, so does the demand for houses because people have more money for a down payment. But if incomes aren’t growing, and house prices are skyrocketing, something fishy might be going on.

Right now, in 2023, homes are pricey, but we’re not in a housing bubble. Prices are still going up in some places, but some experts think they’ll start going down, especially in certain areas. Why? Because mortgage rates and what people can afford to pay for homes aren’t changing much.

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